How to use home equity for retirement income

Your different options for releasing home equity for retirement

If you’re looking for ways to raise extra cash after you retire as your pension fund isn’t quite up to scratch, you might be considering how you can do this and keep your home too. We take a look at the ways you can use your existing home equity to top up your retirement income.

1. Remortgage on different terms

If you have an existing mortgage, you could look to rearrange this with your current or a different provider and start using the equity you’ve built up in your home for retirement income. A new loan deal may give you lower monthly repayments, or act as a loan to give you access to the cash tied up in your home.

The mortgage provider will examine your finances to make sure you can afford to take out a new mortgage and check that you’re eligible. Once you’ve remortgaged, you’ll need to make regular monthly payments and you will be at risk of losing your home if you don’t keep up with them.

You’ll need to check any changes to interest rates and understand how that affects your monthly repayments and the total amount you need to repay overall. You should also be aware of any early repayments charges that might come with taking out a new mortgage before the end of your current mortgage term.

You can remortgage if you’re already retired, but you’ll need to look carefully at the eligibility criteria, as most mortgage providers have upper age limits either on age at application or age at the end of the mortgage term.

2. Retirement interest-only mortgage

If you don’t qualify for a remortgage, you could look instead at a retirement interest-only mortgage. Borrowers aged 55 or over might find them easier to get than a standard interest-only mortgage, as you only have to prove you can afford to pay the monthly interest payments. The rest of the loan is paid off when you die, move into long-term care, or sell your house.

This will mean that there will be less value in your estate when you die, and you’ll have a smaller amount to leave to family or friends.

3. Downsizing

If you want to stay on the property ladder but aren’t too attached to your current home, downsizing by selling and moving to a smaller, less expensive property can free up capital that you can use to support your living expenses. This could be a good option if a bigger house is taking too much time and effort to maintain, or you have more space than you need once your children have left home.

You’ll have to factor in how much you could get in the current market and how long it might take to successfully sell up and buy somewhere new, as well as moving costs such as estate agent and solicitor fees.

This isn’t the option for you if you want to stay where you are, but it’s worth considering releasing equity for retirement this way if you're happy to move house and live somewhere new.

4. Home Reversion Plan

A home reversion plan is one of two main types of equity release that involves selling all or part of your home to a home reversion provider, who will give you a cash lump sum or a regular income in return. You can then stay in your home rent free for the rest of your life.

When you die or go into long-term care, the provider will sell the home to settle the debt, and anything left over will go to your estate.

5. Lifetime mortgage

With a lifetime mortgage, the other main type of equity release, a loan is secured on your home and you either get a tax-free cash lump sum or you can draw down amounts of the loan in instalments. This doesn’t need to be repaid until you die or go into long-term care.

You can take out a lifetime mortgage even if you haven’t paid off all of your current mortgage, as long as the outstanding mortgage is cleared when setting up the arrangement – this can be done using some of the funds that are released. However, you should be aware that using equity release to repay an existing mortgage may cost more in the long-term.

With some lifetime mortgages you have the option to repay the interest with regular payments, or the capital plus the interest can be repaid when you die or move from your home into permanent long-term care. The loan is usually paid off using the money from selling your house, or your beneficiaries may choose to use other capital to settle the loan so they can keep your home.

Who can use their home equity for retirement income?

If you’re interested in releasing equity for retirement so you can keep your home and increase your income, you’ll need to meet some eligibility criteria. Broadly speaking these are:

• For a lifetime mortgage you, or the youngest applicant in a joint agreement, need to be 55 or over.
• For a home reversion plan the youngest applicant needs to be at least 60.
• For both types of equity release you need to own a house in the UK that’s worth at least £70,000.

There can be additional criteria that apply for specific products, and these vary from provider to provider.

Please be aware that equity release will reduce the value of your estate and may affect your entitlement to means-tested state benefits. If you’d like to find out more about lifetime mortgages and releasing equity for retirement, start by checking how much equity you could release with our online calculator: