Equity release is seen by many people as an attractive solution to the problem of needing to raise money in retirement without having to sell the family home.
But how much can you actually get from an equity release scheme?
What is equity release?
There are two main factors that equity release providers will look at when they work out how much they can offer customers: how much their property is worth, and how long they are likely to live for after taking out the plan.
The latter is based on their age (and that of their spouse in the case of joint applications) and their current state of health.
This is important because providers typically don’t make any return on the equity release deal until their customers die or move out into long-term care.
So the younger someone is when they take out equity release, the less money they will be able to raise, other things being equal.
Five poor equity release deal warning signs
The most common type of equity release scheme is known as a lifetime mortgage.
This involves you borrowing a certain sum against the value of your home, with the capital plus interest only liable to be repaid when you die or move into long-term care.
Each equity release provider will set a limit for how much you can borrow expressed as a percentage of your home’s value.
Younger customers – you normally need to be 55 or older to take out a plan – can expect to borrow significantly less than half what their home is worth, while older people or those with serious health issues might be able to borrow as much as 60%.
On a home valued at £300,000, the maximum amount that could be released could vary from £100,000 or less to around £180,000 – but of course customers can take lower amounts if they want.
Equity release and moving house
Home reversion plans
The other type of equity release is called home reversion, which means you sell part or all of your home to the provider while retaining the right to live there for the rest of your life.
The minimum age for home reversion tends to be higher – say 60 or 65 – than for lifetime mortgages.
If you decide to sell a 50% stake in your home, you will get an advance of considerably less than half of its current value.
This is to reflect the fact that the provider will have to wait many years, possibly decades, to make any returns.
The younger and healthier you are, the bigger the discount that will be applied. Customers with the greatest life expectancy might get just 20% of the market value of the share that they sell, although this could rise to 60% for older customers.
In the case of a home valued at £300,000, this means that selling a 50% share could generate between £30,000 and £90,000.
These figures are intended solely as a guide. To find out how much you might actually be able to raise, speak to a financial advisor who specialises in equity release.
Use our equity release calculator to see how much money you could potentially release from your property...