For homeowners aged 55 and over, equity release can offer a practical solution to unlock some of the value in their property without needing to move or sell. However, it’s essential to understand how it works and what kind of interest rates are currently available before making any financial decisions.
What Is Equity Release?
Equity release is a long-term borrowing option for older homeowners. It allows individuals to access the equity tied up in their home as tax-free cash, without giving up ownership. The most common form is a lifetime mortgage, where the loan and any accrued interest are repaid when the homeowner passes away or moves into permanent care. Another option, less frequently used, is home reversion, which involves selling a share of the home in return for a lump sum or regular payments.
This form of borrowing is available only to those aged 55 or over, and typically, the property must be worth at least £70,000. The amount that can be borrowed depends on the value of the home and the applicant’s age.
How It Works
There are usually two ways to receive funds: as a single lump sum or in smaller instalments over time. Borrowers are not required to make monthly repayments, although many plans now allow voluntary repayments to help manage the total debt.
Because equity release is regulated, it requires professional advice. A qualified financial adviser must guide you through the process, and a solicitor is also needed to finalise the paperwork. Additional costs include a property valuation and various arrangement fees.
Interest rates for equity release tend to be higher than for standard mortgages, reflecting the long-term and flexible nature of the product. While most plans offer fixed rates, the lack of required repayments means that interest compounds, increasing the debt significantly over time.
The Impact of Interest Over Time
To illustrate how interest can accumulate, let’s consider an example.
Jane takes out £100,000 through an equity release product at a 5% fixed interest rate. In the first year alone, she accrues £5,000 in interest. Even if she makes a partial repayment of £2,500, the compounding nature of the interest means her outstanding loan grows quickly. By year five, without regular repayments, the total debt will have grown to over £121,500.
| Year | Interest Rate | Capital to Be Repaid | Monthly Interest | Yearly Interest |
|---|---|---|---|---|
| One | 5% | £100,000 | £417 | £5,000 |
| Two | 5% | £105,000 | £438 | £5,250 |
| Three | 5% | £110,250 | £459 | £5,513 |
| Four | 5% | £115,762.50 | £482 | £5,788 |
| Five | 5% | £121,550.63 | £506 | £6,078 |
Figures rounded to the nearest penny
Over five years, the interest alone amounts to more than £21,500. This amount, combined with the original loan, would need to be repaid from the sale of the home unless repayments are made during the term.
How Much Can You Borrow?
Most providers set a minimum borrowing amount of £10,000, while the maximum is typically up to 60% of the property’s market value. The exact figure depends on your age, health, and home valuation.
It’s worth noting that many equity release plans come with safeguards. Providers who adhere to the Equity Release Council’s guidelines guarantee that borrowers will never owe more than the value of their home, known as a “no negative equity guarantee.”
Final Thoughts
Equity release can be a valuable financial tool for some, particularly those who are asset-rich but cash-poor. However, the accumulating interest and the long-term nature of the loan mean it’s not a decision to take lightly. Comparing fixed interest rates, understanding the repayment options, and seeking professional advice are all crucial steps before proceeding.
With careful planning and the right provider, equity release could offer a solution that fits both your current lifestyle and long-term financial needs.