Equity release is a way of turning property into cash and is becoming an increasingly attractive option for older homeowners. The schemes can help to pay for a new car, a holiday, home improvements or simply provide extra income.
These loan schemes appeal because, unlike selling-up and downsizing, releasing equity enables you to continue to live in your home while benefiting from the property value that has built up over the years.
However, equity release loans, also known as home income plans, have attracted criticism in the past for being expensive and inappropriate for many homeowners, who could take on extra debt unnecessarily.
To sort the pros from the cons, read our equity release guide, below.
What is equity release?
There are two types of equity release deal: lifetime mortgages and home reversion schemes. They are available only to older homeowners. Some schemes have a minimum age as low as 50; for others, the age limit is 70.
Lifetime loans, otherwise known as roll-up mortgages, are a type of home loan on up to 50 per cent of a property's value, so you must pay interest on how much you borrow. The younger you are, the higher the rate of interest.
However, repayments can be rolled up and are paid in full when the property is sold or when the borrower dies or goes into long-term care.
Reversion schemes, for homeowners above the age of 65, involve selling all or part of your home to an equity release company, then living in it rent-free until you die, or until you go into long-term care. At this point, the company sells the property and takes its cut from the sale proceeds, which will include any growth.
To be eligible for either kind of deal, your home must be in good condition.
Explore other options first
There are disadvantages to the schemes. For instance, state benefit entitlement could be reduced, which would mean having to pay for things such as dental treatment and glasses. The interest rate on lifetime mortgages is usually higher than on standard home loans, so most advisers recommend that homeowners explore other ways to free up cash. Other options include using existing savings, taking out an interest-only loan, moving to a smaller house or accepting financial help from your children.
Talk to your family
Ultimately, releasing equity means that your children will lose a portion of any inheritance, so it is vital to discuss it with them to avoid misunderstandings and recriminations.
Contact a specialist adviser
It is possible to take out equity release loans without visiting an adviser first, but because the loans are complicated, the Financial Services Authority recommends speaking to an expert. You can find mortgage advisers here.
Lump sum or drawdown?
If you are taking out a lifetime mortgage, you will be able to choose between taking out a lump sum, where you get the money in one go, or opting to draw the cash in monthly instalments. If you are very old or in ill-health, you could lose out by opting for income drawdown.
Avoid risks
Equity release plans are now regulated by the Financial Services Authority, which means that borrowers have access to redress from the Financial Services Compensation Scheme if something goes wrong. Safe Home Income Plans (Ship), the self-regulatory body for the equity release industry, has a list of members. Ship members offer borrowers guarantees including the right to live in the property for life and the ability to move to a new property without penalty. They also offer a guarantee that there will be no negative equity, which means that borrowers will never owe more than the value of their homes.
Equity release and inheritance tax (IHT) planning
Equity release can be used to reduce the value of your estate when you die, meaning that your children will not have to pay as much inheritance tax. IHT is currently charged at 40 per cent of your assets above £325,000. Once you have released the equity, you can still pass it on to your children tax-free in the form of gifts.