Equity release is one way over 55s choose to help manage debt.
By unlocking some of the value tied up in your property, you can access tax-free cash. You can use this for many reasons. You can pay off loans and consolidate debt while staying in the home you love.
As with any significant financial decision, you should weigh up the risks and benefits. Equity release can affect your future finances.
It will lower the value of your estate. It may also change your eligibility for means-tested state benefits. It’s also important to understand that using equity release to repay debt could cost you more in the long term, which we’ll explain more about in this article.
What is equity release?
Equity release allows you to access some cash from the value of your home without the need to move home. The amount you can release depends on your age or the age of the youngest borrower. It also depends on the value of your home.
The next step is understanding the two main types of equity release to help you understand which one would best suit you.
Types of equity release
Lifetime mortgages
The most common type of equity release. It’s a loan secured by your home, like a traditional mortgage. However, you don’t need to make any monthly payments. The loan is usually paid back when you or the last borrower on a joint plan dies or goes into long-term care. This is often done by selling the property, but other funds can also be used.
The interest on a lifetime mortgage compounds, which means interest is applied to the original loan amount and to the interest already applied. However with some plans, including the Saga Lifetime Mortgage, you can choose to repay some or all of the monthly interest to help offset the impact of the compounding interest and most plans allow you to make you to make one-off payments (up to a specified limit).
Home reversion plans
You sell part or all of your home to an equity release provider in return for a lump sum or regular payments. You can stay in your home rent-free until you (or the last borrower on a joint plan) die or enter long-term care. The amount you’ll receive for the portion of the house sold will be considerably less than the current market value, and you normally need to be age 60 or over to release equity through a home reversion plan. Home reversion plans are not available through Saga Equity Release.
When the plan ends, the home is sold. The provider will take their percentage of the final sale price.
What can you use equity release for
You can spend your equity release funds on almost anything including:
Releasing equity can also help you manage debts, boost your income, or cover other costs.
How could equity release help you to pay off debt
Equity release is a way to access some of the equity in your home. It can be used to help pay off debt, such as personal loans, credit cards and store cards. However, there are other options you can consider as alternatives. Equity Release could help you to simplify and reduce your monthly costs. Here’s how it might help:
You remain living in your home (and with a lifetime mortgage, will still own it): This can be a way of accessing the cash you need while staying in your own home.
Improve your cash flow: Equity release could free up the cash you've been using to manage your debts, because with equity release, there is no requirement to make monthly repayments, although making payments to cover some or all of the interest is an option to help reduce the total cost of equity release.
Manage costs more easily: Consolidating multiple debts into one can simplify your financial situation. This could reduce your monthly costs if you clear debts with the equity released.
Consolidating debt with equity release can have long-term impacts. While it may help you now, the amount borrowed will grow over time due to added interest (with a lifetime mortgage) and so it is good to always understand the cost of equity release before making any decisions.
It is important to understand that using equity release to pay off debt doesn't make you debt free, as a lifetime mortgage is a loan secured against your home. When considering consolidating unsecured debt using equity release, keep in mind that you will be converting a short-term debt into a long-term liability that lasts until you die or move into long-term care.
As well as paying off unsecured debt like credit cards, equity release can be used to pay off secured debt such as a mortgage, and if you’re considering equity release for this, you can find more on this here. It’s worth noting that when taking out equity release, for any reason, mortgages and other secured debts need to be paid off fully before, or as part of an equity release arrangement.
No negative equity guarantee: If you use a provider who is part of the Equity Release Council, your lifetime mortgage includes a ‘no negativity equity’ guarantee.
This means you or your family never have to pay back more than the value of your home when it's sold following the death or entry into long-term care of the last borrower.
Saga Equity Release and HUB Financial Solutions are both members of the Equity Release Council.
What are some of the risks of equity release?
Smaller estate: Releasing equity will reduce the value of your estate. This will mean you leave less to your loved ones.
Access to state benefits: You could lose access to some means-tested state benefits and future entitlement may be affected too. If you rely on these benefits to make ends meet, equity release might not be right for you. You can read more about the impact on benefits.
Added interest: If you take out a lifetime mortgage then interest is charged to both the loan and the interest that has already been added, meaning that the amount of interest owed will increase every year. This is known as compound interest. Unless you choose to make full monthly interest repayments, your total debt will rise. In some cases, people end up owing the whole value of their home to the provider.
Is equity release right for you?
Equity release could be one way to pay off debt and stay in your home. But you should think about the long-term impact on your savings, estate, and benefits when weighing up the pros and cons of equity release.
You must speak to a financial adviser before you decide as it won’t be the right thing to do in all circumstances. With Saga Equity Release you can get trusted advice from an expert. They'll help you explore all your options and discuss any alternatives to equity release, ensuring you have the flexibility and security you need to meet your financial goals. As part of this advice process, they’ll also look at other options for you and will even tell you if they feel that equity release is not right for you.
The product available from Saga Equity Release is the Saga Lifetime Mortgage which is only available through Saga Equity Release. Remember, you must be 55 or over with a UK property worth £70,000 or more to qualify.
Saga Equity Release is provided by HUB Financial Solutions, and the Saga Lifetime Mortgage is provided by Just.
If you decide to take out a Saga Lifetime Mortgage, there’s an advice fee of £799. You could use your released funds to cover this.
Get in touch today
If you’re thinking about equity release to manage your debt, Saga Equity Release are here to help. Speak to one of our expert advisers today to see if equity release could work for you. Fees will apply, and these will be fully explained to you before you proceed – read more about the costs.
Ready when you are
Chat to an expert and find out if equity release is right for you. Or request a callback at a time that suits you.
