Home equity release, on the face of it, is one possible solution for homeowners short on income but living in a large valuable home. For many in this position the obvious answer is to downsize, which as I’ve written before has its pros and cons. The biggest barrier to downsizing as a financial solution is the emotional attachment we have to a familiar home and neighbourhood. Assuming you don’t want to move, or rent a room, this is where Equity Release may in theory solve the problem.
What Is It?
Equity Release allows you to ‘release’ the equity value (sale value minus mortgage) of your home. There are two variants, Home Reversion and Lifetime Mortgages.
Like a normal mortgage, you take a loan against the property while retaining ownership. Unlike a normal mortgage, it does not need to be repaid until the house is sold. Therefore, you benefit from any increase in the value of your home but these mortgages are expensive, are only for up to around 30% of the value of the home and you must be over 55/60 and have repaid any existing mortgage. As you could end up owing more than your home is worth, getting a watertight No Negative Equity Guarantee is vital.
You sell all or part of your home at a set price and stay in your home rent free for the rest of your life – at which point the house is sold and the reversion company gets (say) 50% of the proceeds and the remaining 50% go to your estate. You may get up to 70% of the value of your home and you get an upfront cash lump sum but you get much less than the market value, you won’t benefit (in full) from future house price increases and you can’t have another mortgage on the property.
Final Points to Note
- Your family/estate may have first option to repay the loan.
- You may have a tax liability on capital ‘released’.
- You may lose certain social welfare benefits.
- You may lose control over maintenance/insurance decisions.
- You may lose the power to move home.
- You will impact your beneficiaries’ inheritance.
- You should first consider downsizing or getting a normal mortgage or renting a room or making ownership / residence re-arrangements with your family.
Note: When I wrote this blog Irish providers had suspended all new equity release business but in January 2021 the Irish Independent reported that a provider is opening to new clients. See also this CPCC page for further information.
If you like this article, try this one: A Financial Advisor’s Guide to Downsizing