If you own your home and have money worries, you might wonder if equity release can help. It’s a big decision that could affect your finances for years to come, so it’s important to understand how it works.
Equity release lets you get cash from your home. It may sound like a quick fix, but is it the best way to deal with debt? Or should you only use it as a last resort? In this guide, we explore everything you need to know about equity release and help you understand the debt solution alternatives that might work better for your situation.
What is equity release?
Equity release is a way for homeowners aged 55 and over to access money from the value of their property without having to sell it or move out. Essentially, it lets you turn part of your home’s value into cash while you continue living there.
There are two main types of equity release schemes available in the UK. The first is called a lifetime mortgage, which is the most popular option. With this, you borrow money against your home’s value, and the loan plus interest is repaid when you die or move into long-term care. The second type is a home reversion plan. With this, you sell part or all of your home to a company, but you keep the right to live there rent-free for the rest of your life.
Both options can provide a lump sum of money or regular payments, depending on what suits your needs best. However, they work very differently and have different risks and benefits that you need to consider carefully.
How does releasing equity work?
The process of releasing equity starts with getting your home valued by a qualified surveyor. This determines how much money you might be able to access. Generally, you can release between 20% and 60% of your home’s value, depending on your age and health.
You’ll need to be at least 55 years old to qualify for most equity release schemes, and you must own your home outright or have a small mortgage left to pay. The older you are, the more money you can typically release because life expectancy affects how the schemes work.
Before you can proceed, you’re required by law to get advice from a qualified equity release adviser. They’ll explain the terms, risks, and alternatives to make sure you understand what you’re agreeing to. The whole process usually takes between 6 to 10 weeks from start to finish.
It’s crucial to understand that with most equity release products, you don’t make monthly repayments. Instead, the interest rolls up over time, which means the amount you owe grows larger each year. This can significantly reduce the inheritance you leave behind.
Can you release equity to pay off debt?
Yes, you can use equity release to pay off existing debts, and many people do choose this option. It can help you clear credit cards, personal loans, or other borrowing that might be causing you stress. The appeal is obvious – you can wipe out monthly payments and potentially reduce your financial pressure.
However, using equity release to pay off debt isn’t always the smartest move. While it might solve your immediate money problems, you’re essentially swapping unsecured debt for secured debt against your home. This means your property is now at risk if things go wrong.
The cost of equity release can be much higher than other forms of borrowing over the long term. Interest rates might seem reasonable, but because the interest compounds over many years without being repaid, the total cost can become enormous. A £50,000 loan could cost your estate £200,000 or more by the time it’s repaid.
Before using equity release to clear debt, consider whether your debts are manageable through other means. If you’re struggling with credit cards or loans, there might be better solutions that don’t put your home at risk.
What is the difference between remortgaging and equity release?
Remortgaging and equity release are completely different ways to access money from your property. Understanding these differences is essential before making any decisions about your home.
Remortgaging means getting a new mortgage to release cash or get a better rate. You usually need to show you can afford monthly payments and then pay them regularly during the mortgage. Remortgaging is available to people of all ages, provided they meet the lender’s criteria.
Equity release, on the other hand, is specifically designed for older homeowners who may not qualify for traditional mortgages due to their age or income. Most equity release plans don’t require monthly payments – instead, the debt grows over time and is repaid when you die or move into care.
The qualification criteria are also different. For remortgaging, lenders focus heavily on your income and ability to make repayments. For equity release, the main factors are your age, health, and property value. Your income matters less because you’re not expected to make regular payments.
Interest rates can vary significantly between the two options. Remortgage rates might be lower initially, but you’ll be paying them off over time. Equity release rates might seem higher, but remember that you’re not making monthly payments, so the comparison isn’t straightforward.
What are the alternatives to equity release?
Before committing to equity release, it’s worth exploring other options that might solve your financial problems without the long-term costs and risks. Several alternatives could work better for your situation, depending on your circumstances.
Downsizing or selling assets
Moving to a smaller, less expensive home could free up significant cash without the ongoing costs of equity release. You own your new home outright and have money left over to clear debts.
However, moving house can be stressful and expensive, with costs including estate agent fees, solicitor fees, and stamp duty. Consider whether you have other valuable assets you could sell instead, such as jewellery, art, or a second property.
Individual Voluntary Arrangements (IVA)
An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to pay back debts over five or six years. You make one affordable monthly payment, and any remaining debt included in the IVA is usually written off at the end.
IVAs can significantly reduce what you owe and protect you from further creditor action. Your home is typically safe if you keep up payments. One thing to consider, however, is that an IVA affects your credit rating for six years.
Debt Management Plans (DMPs)
A Debt Management Plan (DMP) is an informal arrangement where you make reduced payments to creditors based on what you can afford. Many creditors will freeze interest and charges to help make the plan work.
DMPs are flexible – you can adjust payments if your circumstances change, and there are no upfront costs. However, because they’re not legally binding, creditors can still take action against you, and it might take longer to clear your debts.
Equity release might seem like an easy solution, but it’s often not the best choice for managing debt. For expert advice on alternatives like IVAs and DMPs, get in touch with us here at MoneyPlus or, for free advice, you can visit Money Helper.
