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Alternatives to Equity Release – Complete Analysis

alternatives to equity release

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Have you been searching for the alternatives to equity release? Although equity release can be an effective and efficient option to access quick cash in retirement, it is not the only option. We reveal more than one alternative to equity release in this guide. But before we get to them, let’s recap on what equity release really is and its pros and cons

What is equity release?

Equity release is a method of borrowing against your home equity as a senior homeowner. You can receive some of your home equity as either a lump-sum payment or drawdown facility, which does not have to be paid back through monthly repayments. 

Instead of paying back the money you receive each month, the money is only paid back when you sell your home. For most senior homeowners, this means they will only pay back the debt after they die or move into long-term care. You will only be required to sell your property if you have to move into residential care and no longer live at the property. 

Equity release products can be an effective way to unlock money for your retirement, but the long-term cost can be expensive and eat into the inheritance you are due to pass on. Only consider a lender that is authorised and regulated by the Financial Conduct Authority. 

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Who is eligible for equity release?

Equity release is exclusively available to older homeowners. It is still possible to borrow against your home equity when you are younger, but this is done with a second charge mortgage or home equity loan, rather than an equity release scheme. 

The minimum age requirement for equity release tends to be between 55 and 65 years old. The property you want to release equity from must be your main residence and be above a set value, usually around £75,000. 

If you meet these criteria, the lender will come out to look at your property to ensure it meets building regulations and ticks other boxes, such as not being at risk of natural disaster. If the lender is satisfied, you should be able to release more than half of your home equity in some cases. 

Home reversion schemes and lifetime mortgages

Equity release is completed using a home reversion scheme or a lifetime mortgage.

A home reversion scheme is the simplest but least common method. It does not charge interest but asks the homeowner to give up a greater percentage of the home’s eventual sale proceeds in comparison to the equity they receive. For instance, you might ask for 30% equity in your £200,000 property (£60,000) but agree to give the lender 60% of the money from the property’s future sale. 

Lifetime mortgages work in a different way. They let the homeowner take out a percentage of their home equity below 60% and charge a fixed rolling interest rate on this amount. The interest due rolls up and adds to the total debt owed rather than needing to be paid each month. Even with a decent interest rate, the total debt can easily double after 10-15 years for such amounts. 

The Equity Release Council (ERC)

The Equity Release Council is a body that creates rules and regulations that its members must agree to follow as part of their membership. Lenders and financial advisers do not have to become members of the council, but it is in their interest to do so because homeowners usually only seek out members. 

For example, a lender that is a member of the Equity Release Council must:

  1. Guarantee that the homeowner will never be forced to leave or sell their home for normal reasons. If you lie on your application or let the property fall into disrepair you can be asked to sell. 
  2. Agree that any debt that exceeds the eventual sale proceeds of a property does not need to be repaid. So, if your lifetime mortgage grows so big that your home will not pay all of the debt back, you still won’t have to pay the shortfall. This is called the negative equity guarantee. 
  3. Allow you to move home and take your lifetime mortgage with you, as long as the new property is a ‘suitable alternative’. 

In a nutshell, you are much better off using equity release providers that are members of the ERC. 

What are the pros of equity release?

The benefits of using an equity release plan are:

  1. You can receive the money as a lump sum or as a drawdown
  2. The money is not taxed because it is officially a loan
  3. You can spend the money on anything you wish
  4. You continue living in your home as normal without paying rent
  5. You do not have to make principal or interest monthly repayments

This list is not exhaustive and does not include all the benefits of using a member of the ERC, such as the three listed in the section above. 

What are the cons of equity release?

The biggest con of equity release is that it can become extremely expensive. As explained with both a home reversion plan and lifetime mortgage, either of these methods can quite easily more than double what you owe over time. When your debt increases significantly, it simultaneously eats into the value of your estate you wish to pass on to beneficiaries. 

Those with estate beneficiaries who are relying on some inheritance to ease their own financial worries may be put off using any equity release plan. If that sounds like you, we will discuss some alternatives to equity release shortly. 

Why is equity release a bad idea?

Equity release is neither a good or bad idea all of the time. Some people believe it is always a bad idea because of how much it can cost over the long term. Those people are right to be wary of the overall costs of repaying an equity release scheme, but that doesn’t necessarily make it a bad idea because the decision goes beyond finances. 

For example, the cost of equity release may be irrelevant to someone who does not have any children or grandchildren to inherit their property in the first place. Or your beneficiaries may be successful and wealthy, and wouldn’t miss the money that the lender recovers. These are not the only instances when it could still be a good idea. 

What does Martin Lewis think of equity release?

Martin lewis frequently features on This Morning to give anonymous advice to UK debtors. A couple of years ago, one man asked whether he should use equity release to pay off his substantial credit card debts. Martin Lewis responded by saying it can be a good idea depending on personal circumstances, continuing to state: 

“If you are going to do equity release you do it as little as possible and you do it as late as possible”

Overall, Mr Lewis believes it can be a good idea depending on your lifestyle and circumstances, which is why independent personal financial advice is essential before making a decision and signing any paperwork. 

By the way, you can use equity release to pay off debts. And you can read about using equity release as a debt solution in our dedicated guide! 

Will equity release affect my state pension payments?

Taking out an equity release scheme will not affect your entitlement to receive the standard state pension because it is not means-tested. But boosting your savings with a lifetime mortgage or home reversion plan can cause you to lose access to pension credits because these are based on the money you hold. 

For every £500 you have in your bank above £10,000, you currently lose £1 in pension credits. Most people who release equity release will wipe out all their entitlement to pension credit payments. And this can have further consequences. When you no longer receive pension credits, you can lose access to some other benefits, such as a council tax reduction.  

Is there an alternative to equity release?

If you need money in older age to help with retirement or general living, there are alternatives to equity release. Equity release is not the only way of securing cash for your retirement. 

What are the alternatives to equity release?

The most common alternatives to equity release are:

  1. Downsizing 
  2. Alternative lifetime mortgages (RIO mortgage and enhanced lifetime mortgage)
  3. Renting out a room in your home
  4. Saving
  5. Starting a side gig

Equity release alternatives explained

We explain each alternative to equity release – i.e standard equity release – below:

  1. Downsizing 

One of the best alternatives to equity release schemes is to simply downsize. By selling your current property and buying a smaller less-valuable home, you can free up some cash to spend on your retirement. Not only will you get quick access to a pool of cash, but you’ll also pass on 100% of your property within your estate to beneficiaries. 

There may be times when downsizing is not very appealing. Everyone knows the process of selling a property and moving can be stressful. This might be even less appealing as you get older. Additionally, you might have a sentimental attachment to your current family home and do not want to leave it. 

  1. Retirement interest-only mortgage (RIO) 

A Retirement interest-only mortgage – also known as an interest-only lifetime mortgage – is not exactly an alternative to equity release, but it is an alternative type of equity release. 

If you are put off using a lifetime mortgage because of how costly it can become, you may prefer to use one where you are allowed to make interest repayments. By repaying the interest instead of allowing it to build up, you can maintain the same level of debt when you take out the loan as when the home is sold. And thus, you can ensure that most of your home’s value goes to loved ones rather than the lender when the time comes. 

  1. Enhanced lifetime mortgage

Another alternative to standard equity release plans rather than an alternative to equity release altogether is an enhanced lifetime mortgage. This is ideal if you do not have long left to live due to a terminal illness and want to access even more money than normal.

As part of an enhanced lifetime mortgage application, you can explain your health issues and even provide medical records to prove your claims. Due to your shorter life expectancy, you can take out a much larger lump sum than normal, which may be helpful to pay for private care. 

  1. Renting out a room

If you don’t want to use any equity release plan but also don’t want to downsize due to sentimental reasons, you may want to consider renting out a room. You could rent out a room in your home to a student or someone you know and make some money from the arrangement. 

However, you should also be aware that receiving any rental income when you rent out a room is subject to tax. You’ll need to report the amount you profit to HMRC on a Self-Assessment tax return each year. 

  1. Saving

Although not as efficient, you could avoid using an equity release plan by saving what you can. By putting some money away each month, you can gradually build your savings pot to help make retirement more comfortable. Search for a high-interest savings account to make the most of your money, such as a fixed-term bond account. 

  1. Starting a side hustle

Scores of UK residents don’t have just one source of income, and even retirees still manage to make cash through additional projects.  There are many different side hustles that you may want to get involved in – and we list some of them here

Discover more about equity release with MoneyNerd!

For more information on equity release and any of the equity release alternatives discussed above, check out the MoneyNerd blog today. 

We’re publishing new equity release content regularly so you’re always updated on these schemes, their benefits and risks. Get Involved again soon!