‘Is equity release right for me?’ 

This is a critical question many UK homeowners find themselves grappling with when considering options for accessing capital tied up in their homes. 

As you approach retirement, the thought of financial security becomes more important than ever, which could be why more than 90,000 Britons decided that equity release was right for them in 2022.¹

The equity release question becomes even more pertinent when you consider that over 50s own 78% of all of the UK’s privately held housing wealth and those over 65 hold an estimated £2.6tln of net housing wealth.²

Whether you should consider equity release is very much dependent on you.

This article serves as a comprehensive guide to understanding equity release. At EveryInvestor, we aim to equip you with the knowledge needed for evaluating if equity release could be suitable for your unique situation and future aspirations. Consider this a preparatory step before consulting a financial advisor.

Therefore… 

What Exactly Does Equity Release Mean?

Equity release is a financial tool that allows you access the wealth tied up in your home without having to sell it.

It is an option for those over 55, offering a way to tap into your property’s value whilst you continue living there.

There are two main types: Lifetime mortgages and home reversion plans.

With a lifetime mortgage, you borrow against your home, repayable later.

Home reversion involves selling a part of your property in exchange for a lump sum or regular income, whilst still living there.

Read More: What Does Equity Release Mean?

Is Equity Release Suitable For You?

Equity release can be a suitable option for individuals who are looking to access the value of their home without having to sell it.

It is particularly beneficial for older homeowners who have a significant amount of equity built up in their property.

By releasing this equity, individuals can use the funds for a variety of purposes, such as supplementing their retirement income, making home improvements, or paying off debts.

However, it is important to carefully consider the implications of equity release, as it may affect eligibility for means-tested benefits, inheritance planning, and the amount of equity left for future generations.

Equity release is not suitable for everyone, and it is crucial to assess individual circumstances before making a decision. Factors such as age, health, and financial goals should be taken into account.

Additionally, it is recommended to seek independent financial advice to ensure that equity release is the right option and to explore alternative solutions.

Whilst equity release can provide a valuable source of funds, it is important to understand the potential risks and costs involved.

By carefully considering one’s situation and seeking professional advice, individuals can determine if equity release is the suitable choice for them.

8 Things You Must Consider to Determine: Is Equity Release Right For Me?

The eight things you must consider when asking yourself, “Is it a good idea to release equity?“, include questions like why you need access to capital and how much of it you require.

A full list of questions to consider…

1. Why do I need the money?
2. How much money do I need?
3. What is my current income and expenditure?
4. Could I afford the loan?
5. What impact will equity release have on the value of my estate?
6. Am I considering my future plans and goals?
7. Have I explored alternative options?
8. Where can I find professional financial advice?

Thinking about these questions could help guide your thoughts if you are about to consult an equity release broker or advisor.

Remember… 

This article is a guide, not a substitute for professional advice.

Therefore…

#1. Understanding Your Reasons For Considering Equity Release

Understanding your reasons for considering equity release is crucial in determining if it is the right financial decision for your unique circumstances. 

A 2023 SunLife survey revealed that prospective borrowers often seek equity release to fund holidays and home improvements.³

What prospective borrowers polled by SunLife would spend their equity release funds on, in order of popularity:

1. 58%: Holidays or travel
2. 49%: Home improvements or adaptations
3. 25%: Early retirement
4. 22%: Paying off a mortgage and other debts
5. 16%: Early inheritance
6. 13%: Family gifts
7. 13%: Supporting family (studies, house deposit, etc.)
8. 7%: Something else

Note: When answering the survey, respondents were allowed to choose more than one category to use their prospective equity release funds on.

Your selections may, of course, be different and will depend on a number of personal and financial factors.

What about your feelings?

Do not forget to think about the emotional dimension attached to retirement planning. 

If you are extremely attached to the family home, that may sway you towards equity release, as you would not need to leave behind a lifetime of memories.

However…

Whilst emotions are often a factor, they should be considered alongside objective financial points.

Consider, for instance, whether moving to a smaller property, or a home in a more retirement-friendly location, may be a more suitable option for you in the longer term. 

In short…

If you are property-rich but need income in later life, equity release could potentially be the solution—as could an alternative like downsizing or renting out a room.

Remember…

Seek advice from an independent equity release advisor or broker if you are considering equity release or any alternative solutions.⁴

#2. Considering How Much Equity You Need and For How Long

Considering how much equity you need and for how long will be a crucial step when you are deciding whether an equity release loan could suit your purposes. 

Follow these steps to make an informed decision…

• Define your long-term financial goals: Outline your reasons for releasing equity, such as supplementing retirement income, home improvements, or paying off debts. 
• Assess your future financial situation: Review your income, expenses, and savings to determine if additional funds are needed or if there are alternative ways to achieve your goals.
• Calculate the required amount: Consider potential future expenses or emergencies to estimate the money needed for your financial goals.
• Factor in loan duration: Determine the length of time you will need the funds, considering factors like age and life expectancy. 

Once you have worked out how much money you will need to fund your retirement, it is time to calculate how much equity you may be able to access and consider whether you will have enough to cover your projected expenses.

If you would like an estimate of how much you could potentially borrow through an equity release loan, you could use our free equity release calculator for an approximation.

#3. Assessing Your Income and Expenditure

Assessing your income and expenditure is very important when determining if equity release is right for you.

By doing so, you may even find that adjusting your budget could be a better solution.

How to obtain a clearer picture of your own finances…

1. List all your income sources (e.g., salaries, pensions, investments).
2. Divide your expenses into two categories: essential and non-essential.
3. Track your spending to understand habits and identify areas for change.
4. Analyse your cash flow by subtracting all your expenses from income.
5. Set realistic short-term and long-term financial goals.
6. Create a budget reflecting your goals, income, and expenses.
7. Review and revise your budget regularly.

Assessing your financial situation can help you make informed decisions about equity release or alternative solutions.

Consider…

Predicting future financial situations can be complex and uncertain, and professional advice should be sought.

#4. Determining Affordability

Determining affordability is essential when considering equity release — or any financial decision.

Consider, equity release comes with costs and may not always be the most economic borrowing method.

Additionally, because the loan is only designed to be paid back when you pass away or move to long-term care, equity release schemes often come with Early Repayment Charges⁵, which can further reduce the value of your estate if you decide to repay the loan before the end of the term.

#5. Considering The Potential Impact On The Value Of Your Estate

Considering the potential impact on the value of your estate is crucial when thinking about an equity release loan. 

Potential effects include, but may not be limited to…

• Reduced inheritance: Equity release reduces the equity in your property, which in turn decreases the value of your estate, so your beneficiaries may receive a smaller inheritance than they would have otherwise.
• Interest accumulation: The longer the loan is outstanding, the more interest accumulates, further reducing the value of your estate. 
• Property value changes: If the value of your property increases significantly, it may help offset the impact of the equity release, but if property prices decline, the impact on your estate could be more substantial.

#6. Thinking About Your Future Plans and Goals

Thinking about your future plans and goals may seem like an obvious step, but it is one that can easily be overlooked when you are worried about your retirement finances.

What are your expectations for your retirement?

Consider factors such as…

• Retirement lifestyle: Envision your desired retirement and assess if equity release can support it.
• Healthcare needs: Evaluate if equity release can cover potential future healthcare costs and if you need to save the option for emergency funds at a later stage.
• Family support: Assess if you have family members you may need to support and if equity release can help with this.
• Inheritance: Consider the impact on your estate and communicate with your family.

#7. Exploring Potential Alternatives To Equity Release

Exploring potential alternatives to equity release is a very important step before deciding on equity release. 

Consider options like downsizing to a smaller property, renting out a portion of your home, or using your savings or investments to meet financial goals. 

Why?

Equity release may not be the right solution for everyone. 

For example, it may affect your tax status and eligibility for state benefits⁶, result in a substantial amount of accumulated interest over time, and significantly reduce the value of your estate.

What Is important…

Seeking professional financial advice can help you evaluate these alternatives and make the best decision for your circumstances.

#8. Seeking Independent Financial Advice

Seeking independent financial advice is crucial when considering equity release or any major financial decision. 

An independent financial advisor (IFA) registered with the Financial Conduct Authority can assess your personal situation, provide unbiased guidance, and recommend the most suitable financial products or solutions.

Their expertise ensures you make informed decisions that align with your financial goals and minimise potential risks.

Key Takeaways

The key takeaways from this article include eight points to review if you are considering equity release.

The factors to consider…

• Reasons for Equity Release: Identify why you need the funds — for home improvements, travel, debt payment, etc.
• Equity Amount and Loan Duration: Define your financial goals and future financial needs, and calculate your required funds and potential loan duration.
• Income and Expenditure Assessment: Review your income and spending habits, and consider if budget adjustments can meet your needs instead.
• Affordability: Evaluate your capacity to handle the costs of equity release, including potential Early Repayment Charges.
• Impact on Estate Value: Understand how equity release can reduce your estate value owing to decreased equity and interest accumulation.
• Future Plans and Goals: Consider whether equity release aligns with your retirement vision, potential healthcare costs, family support needs, and inheritance plans.
• Equity Release Alternatives: Explore other options like downsizing, renting out part of your home, or using savings / investments. Understand the potential risks of equity release, including the implications of long-term interest compounding and the impact on eligibility for certain benefits.
• Independent Financial Advice: Consult an unbiased independent financial advisor for informed decision-making.

Common Questions

In Conclusion

Depending on individual needs and circumstances, equity release can be a useful way for homeowners to access their property’s value while maintaining their cherished home. 

By understanding your reasons for considering equity release, evaluating the impact on your estate, assessing your income and expenditure, contemplating future plans, and seeking independent financial advice, you will be well-equipped to make a well-informed decision. 

The key lies in carefully analysing your individual circumstances and financial goals. 

It is also crucial to consider the pros and cons of equity release against other options like downsizing, retirement savings, or renting out part of your home. 

Always consult with an independent financial advisor to understand your options and make an informed decision

In conclusion, consult a professional, and ultimately ask yourself: Is equity release right for me?