Money Matters – Spend your house
7 March 2022
Paul Lewis is an award-winning financial journalist and broadcaster.
Equity release is a popular way to unlock money from your property, but does it make financial sense?
Your home is probably your most valuable asset – financially anyway. And yet many older people live in a home worth a small lottery win but struggle to pay for things they need. There are ways to cash in some of that value and get money out of your home in a risk-free and, nowadays, economical way.
How it works
It’s called equity release – because you set free some of the ‘equity’, or value, in your home. You do that by taking out a loan secured on your property. Each year interest is added to the money you have taken out. But you do not pay the interest. Instead, it is added to the loan. The next year you are charged interest on the whole lot, including the interest from the previous year. That is called compound interest and it can build up the debt substantially. In the past the interest rates charged on equity release were high and the total owed grew very rapidly. But nowadays competition and falling interest rates generally have meant that the typical interest charged on equity release is now similar to that charged on a mortgage used to buy a home. You can get products that charge below 3% but typically expect rates of around 4%.
At that level your debt will double every 18 years, so if you borrow £10,000 and live 20 years then the debt from your estate will be approximately £22,000 – a rise of 120%. During that time, of course, house prices will also have risen – Nationwide says that over the past 20 years they have increased 173%. So there will still be plenty left for the family to inherit.
The maximum amount you can take out of your home depends on your age. The total varies from firm to firm but, roughly speaking, at 65 you can borrow a bit more than a third of the value of your home; at 75 just under half; and at 85 rather more than half. If you have ill health, you could borrow more. For couples, the amount is based on the younger and healthier person.
New equity release plans are more flexible than before. With some you can pay the interest as you go along. Or you can agree a maximum amount to borrow but only take money out as and when you need it, so interest is only charged on the amount you have released. Either way, that can mean more is left for your heirs.
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Use it well
The most popular use for at least some of the money is improving a home or garden. As you get older, a modern kitchen or bathroom can take account of changes in mobility and flexibility. As fuel prices rise, an efficient new boiler or heating system can help control monthly bills and keep you warm. If you have a garden, raising beds and improving pathways can adapt to your changing abilities to bend and dig or walk to that perfect spot to sit in the sun.
As travel begins to get back to normal, you could consider taking a once-in-a-lifetime holiday. Many are still unavailable and there is still a risk of cancellation or postponement, but if you take out an equity release loan you will at least have the money ready to pounce on an opportunity.
Equity release can also help your family. Many young adults could afford the repayments on a mortgage but struggle to save the deposit. Helping with that can be the key to home ownership and the security it brings. The bigger the deposit the lower the mortgage rate they can get, therefore saving them money every month.
Many people have debts when they retire. Others find managing on a lower income leads them to borrow more – often at high rates of interest on personal loans or, worse, credit cards. Paying them off can mean you have more income for things you need or want and take one worry away from growing older.
If you already have an old and expensive equity release product, it may be worth taking out a new cheaper one to pay off the old one, despite the cancellation fees. That could reduce the total debt your heirs eventually pay. If you have an interest-only mortgage coming to the end of its life and do not know where you can get the money to pay off the capital, you may be able to use equity release to do that.
Equity release is not suitable for everyone. If you are on means-tested benefits such as pension credit or council tax reduction, that help may stop if you take out equity release. A good independent financial adviser will be able to do the sums to see if it is worth it or not. Equity release will not affect your state pension or disability benefits and is not taxable. Even if it suits you, be aware that flats may not be accepted and specialist retirement property probably will not be. You may want to tell your family but remember it is your money not theirs and your decision alone.
Taking out an equity release plan is a major decision. There are arrangement fees and lawyers’ bills. Only use a firm that is a member of the Equity Release Council. This guarantees that however much you borrow and however long you live, the debt will never exceed the value of your home. Always take independent financial advice. Nowadays, all equity release advisers must have specific qualifications, but only independent advisers will survey the whole market and find the ideal product for you. One I know well says he advises half the people who come to him not to do it. If you get that advice, then take it. Do not shop around to try to find someone with a different view.
Article first published in Saga Magazine March 2022
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