Is Equity Release a Good Idea?

It’s a simple fact of life: aging means things get more expensive. When we’re children, life is free –– at least from our perspective –– of both worries and life’s many costs. As the years tick by, expenses like gas, rent, and health insurance come into view, followed by mortgages, college funds, and so on. Eventually, these day-to-day costs can feel crushing, leading older adults to explore other sources of income and revenue streams. And for those over 55 (or 60, in some cases) without the time, energy, or patience for a side hustle, equity release may look like the most appealing option. 

But what is equity release? And is equity release a good idea? Below, the team at Truehold examines the ins and outs of the equity release process to help you decide if this is the right path for you. 

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What is Equity Release? 

With each passing mortgage payment, homeowners accrue home equity: the portion of a home that is owned outright as opposed to owed to a lender. When you sell your home, this equity is what you walk away with. So, if you own your home in its entirety, you’ll walk with the entire sale price minus realtor fees (and applicable taxes, of course) –– should you still owe on your home loan, however, your lender will get their payout first. 

But for qualifying homeowners, equity release can be a way to access home equity without selling the property (with a tax benefit, to boot.) Through equity release, homeowners over 55 can access a tax-free lump sum of money from home equity agreements, which can then be used for any purpose they choose. This money can be applied toward home improvement projects, a grand vacation, or as a supplement to social security income, assisting with day-to-day expenses. 

Of course, there is a catch: In exchange for this lump sum, homeowners agree to either sell a portion (or all) of their property or take out a secure loan against the value of their home. The loan, including any interest, is typically repaid when the homeowner sells the property or passes away. With this in mind, home equity release can be a great way for older individuals to access the wealth tied up in their homes, but this tool is not without its risks and limitations. Before we examine these, however, let’s take a closer look at how equity release works.

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How Does Equity Release Work?

As we mentioned above, releasing equity allows homeowners over 55 to release the equity in their homes without having to sell it. There are two equity release pathways worth digging into: lifetime mortgages and home reversion plans. 

Lifetime Mortgages

A lifetime mortgage is the most common type of equity release, allowing qualifying homeowners to access a portion of their home equity without having to sell it or move out by taking out a loan against the home’s value. When the home is sold, or when the owner(s) pass away, the loan is repaid — with any interest rate accrued –– using the home’s sale proceeds. Considering interest compounds, many homeowners may consider making regular payments to limit the future amount due. 

The loan amount will depend on factors like the property’s value, the homeowner’s age, and their health, as older homeowners may be able to borrow more against their property’s value (as much as 50%, in some cases.) Homeowners with health conditions or smoking or drinking habits may also benefit through an enhanced lifetime mortgage, which can come with reduced interest rates and a greater percentage of the home’s value.¹  

Home Reversion Plans

Unlike a lifetime mortgage, through which homeowners take out a loan against their home equity, home reversion plans see qualifying homeowners sell all or part of a property to a home reversion company. And through a home reversion plan, homeowners can choose a lump sum or regular income –– which can provide steadying financial support for years to come. The requirement age of a home reversion plan is also raised to 60, compared to a lifetime mortgage’s 55.²

After selling a portion of the property, homeowners can continue to live in the home for as long as they want. And like a lifetime mortgage, the payout amount will come down to property value, age, and the percentage of the home being sold –– with older homeowners generally tapping into a larger percentage of their home’s value, as high as 60%. Considering a home reversion plan is a sale, not a loan, no interest or repayment period is attached to this equity release pathway. 

What Are the Benefits of Equity Release? 

For the right homeowner and situation, equity release can be highly beneficial for several reasons. Firstly, releasing equity offers homeowners a way to access the wealth tied up in their home without having to sell it and vacate the property, which can be particularly valuable to those who may be asset rich but lack a steady cash flow. 

Equity release can also provide a tax-free lump sum that can be used for any purpose, helping with day-to-day expenses or funding any number of projects, purchases, or memory-making trips. Additionally, equity release allows you to stay in your home for as long as you choose (or as long as you live) –– with no requirement to make monthly repayments. With all these benefits in mind, equity release is not without its downsides, and these are worth considering before deciding if this strategy is right for you. 

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What Are the Downsides of Equity Release? 

One of the biggest drawbacks when it comes to equity release is that the amount of equity released can be significantly less than the market value of the property –– meaning you could very well be selling yourself short compared to selling your home outright. Further, if you have plans to leave a family home to your children or relatives, equity release can make this plan a near impossibility. In the case of a home reversion, the window to vacate the home following a homeowner’s death is extremely slim, potentially placing unwanted stress on already grieving family members.   

Another potential downside is that, with a lifetime mortgage, the interest accrued over the course of an equity release loan can be substantial –– eating away at more of your home’s value if not paid off through regular payments. While many homeowners may see a loan as “free money,” they should be mindful that the bill does, eventually, come due. 

These disadvantages can scare many homeowners away from pursuing equity release, but it’s worth consulting with an advisor for financial advice to understand the full risks and benefits associated with a lifetime mortgage or home reversion plan. 

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Is Equity Release Right For You? 

While we can help you understand the ins and outs of the equity release process, we can’t give you a definitive answer as to whether this strategy is right for you. That’s best left to a financial adviser, especially if you do not know how to calculate home equity. We can, however, offer some specific circumstances where equity release might be an appropriate approach to unlocking your wealth. 

• If You’re Struggling With Day-to-Day Expenses: When faced with late fees, threats from banks and other lenders, or just increasing costs of living due to inflation, it can feel like equity release may be the only option. Whether or not this is true will come down to the individual. Still, for some homeowners being a home equity release provider may be the best strategy to access the wealth tied up in your home –– alleviating many of the financial stresses associated with daily life. 

• If You Have No Plans to Pass Your Home Down: As mentioned above, the equity release process can cut into a potential inheritance or eat away at it entirely. But if you’re a homeowner with no heirs, or no plans to pass your home down to the next generation, equity release can enable to you make a life’s worth of memories in 20 years (or at least live extra comfortably for as long as you can.) 

• If You Can Get a Fair Deal for Your Home Equity: Older homeowners and those who home reversion companies consider to be low-risk investments can get far more through the equity release process than younger, healthier homeowners. So, if you fall into this category, and get closer to your home’s full value, equity release may be right for you. But for younger homeowners who may lose up to 70% of their home’s market value through this process, it might be best to hold off.)

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Equity release is just many of the ways homeowners can tap into their home equity. To explore other ways to access this hard-earned wealth, Truehold can help. With our sell and stay transaction, you can sell your home to unlock your equity, all while staying in your home as a renter. Learn more about our agreement to unlock your wealth today. 

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Sources: 

1. EveryInvestor. What’s an Enhanced Lifetime Mortgage & How Does It Work? https://everyinvestor.co.uk/enhanced-lifetime-mortgage/

2. Nerdwallet. What Is a Home Reversion Plan? https://www.nerdwallet.com/uk/mortgages/what-is-a-home-reversion-plan/