What Is the Alternative to Equity Release if You’re Under 55? Guidance & more
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Can you get equity release under 55? All lifetime mortgages and home reversion schemes have minimum age requirements to access these loans. So, can you release equity with these products at 55 years old?
We also discuss some alternative options to release equity – just in case you don’t meet the age requirement. Read on to uncover more!
What is releasing equity?
Releasing equity is a way of leveraging the value you have in an asset through a loan for other purposes. It is most often done by releasing home equity.
Home equity is the value you have in your home with no debts attached. Because most people just have a single mortgage on their home, which was used to help buy it in the first place, home equity can usually be calculated by subtracting the remaining mortgage balance from the current property value. For example, a £140,00 home with an outstanding £70,000 mortgage means the homeowner has 50% home equity.
Some of this home equity can be accessed as a cash lump sum or drawdown (regular payment) through a loan. The homeowner gets a type of loan that allows them to borrow money against their home equity and spend the money how they wish, possibly to help buy another property or to make home improvements. Any loan that allows you to borrow against equity is called releasing equity.
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How do seniors release equity?
Seniors do not have the same access to loans that let you borrow against equity because they may be considered too old or are no longer employed. Some seniors can still access home equity loans, but they can have more success using an equity release scheme.
Equity release is a method of borrowing against home equity exclusive to seniors. No monthly repayments are due on the loan amount or any interest when applied. Instead, the loan is repaid when the home is eventually sold, either after the homeowner dies or moves into long-term care.
A lifetime mortgage and a home reversion equity release plan are the two methods that seniors use to release equity. You can find details on both types of equity release below.
- Lifetime mortgage
A lifetime mortgage allows the senior homeowner to receive a lump-sum or drawdown facility up to around 60% of their home equity at best. This mortgage charges a fixed interest rate for the entirety of the loan term. Neither the loan amount or interest needs to be repaid. The interest rolls up and makes the total debt grow bigger each month.
Some people choose to make voluntary interest repayments to prevent the debt from escalating significantly, which is what happens over time. If you borrow around £60,000 at a standard interest rate, the amount you will owe from your eventual property sale proceeds can easily be more than double this amount after 10-15 years.
There are some variations of lifetime mortgages, such as an enhanced lifetime mortgage. An enhanced lifetime mortgage works exactly the same as explained above. But the key difference is that during the application process, the homeowner can submit a health questionnaire and medical records to prove they have a reduced life expectancy. If approved, they can then access more equity to help with medical costs or other expenses.
- Home reversion plans
A home reversion plan is not as common as lifetime mortgages but it remains an option in the UK. The homeowner can again choose from a lump sum or drawdown, but no interest is charged on the loan amount. The lender ensures they make a profit on the loan by getting the homeowner to agree to give them a percentage of the future sale proceeds double or even triple the percentage of the equity released.
For example, taking out 20% equity (£40,000) from a £200,000 home might mean giving up 50% of the future sale value. If the property were to increase by 10% then you would pay back £120,000 for your £40,000 loan.
Some pros and cons of equity release schemes
There are many pros and cons to weigh up when you consider a lifetime mortgage or other equity release scheme.
The general pros of equity release:
- The money can be paid out as a lump sum or drawdown. The latter could be better if you receive means-tested benefits or do not plan to spend most of the money in one go.
- The money you receive is a loan and therefore is not subject to income tax or CGT.
- You can spend the money on whatever you want, usually cruises, home improvements and private care services.
- You can even gift the money to family members or loved ones. There may be inheritance tax implications if it is gifted within seven years of your death.
- You remain in your home and do not pay rent or monthly loan repayments
- There are no alternatives to equity release that offers a loan with no monthly repayments – they’re unique!
Additional pros choosing an ERC member
The Equity Release Council (ERC) is a voluntary membership group for financial advisers and equity release lenders. They must be authorised and regulated by the Financial Conduct Authority to join, and once joined, they must abide by the rules and regulations made by the council. These rules are made in the interest of the senior homeowners, and therefore lenders that are members are preferable.
Some additional benefits of equity release from lenders that are members of the ERC are:
- You can never be evicted – ERC members guarantee you will never be evicted for normal reasons outside of fraud.
- You do not have to pay debts bigger than your home’s sale value – if the interest on your lifetime mortgage has made the debt grow bigger than its value, the negative equity guarantee prevents you from having to pay the extra.
- You can move house – you can still move home and take your equity release loan with you as long as the new property is suitable, which means of equal or higher value and just as easy to sell.
The cons of equity release
The overriding con of choosing equity release is its cost. Many homeowners get a lifetime mortgage or home reversion plan and then end up paying double or more back what they initially received. This might not be a concern for some people, but those with children and grandchildren who they intend to leave their estate to might have a more complex decision to make. Another drawback of equity release is the early repayment charges, which are often excessively high and almost always unaffordable
Can I release equity at 50?
You will not be able to release equity at 50 years old with an equity release plan. This is because most equity release providers set a minimum age requirement above this age.
Even if you are a joint homeowner with an older partner, you won’t be able to use equity release products until you meet the age requirement. This is because the youngest homeowner is subject to the age requirement.
What is the minimum age for equity release?
Most equity release plans have a minimum age requirement of 55 years old. Some equity release plans set older age requirements, possibly 60 or even 65 years old.
You should not consider removing someone from the property ownership to become eligible to apply for an equity release plan (because they do not meet the age requirement). This could be dangerous and result in the younger partner being made homeless in the future.
There are additional criteria to meet to get an equity release scheme. The home you release equity from must be your main residence and it must be of a minimum value, typically around £75,000 with most lenders.
What is the age limit for equity release?
There is no upper age limit for equity release. If you apply as someone who easily exceeds the minimum age requirement – usually 55 – then you may receive a better deal. Martin Lewis went on record to say that lifetime mortgages should be left until as late as possible. This is because the later you leave them, the less interest that they will incur until you die or move into care.
Is there an alternative to equity release?
If you cannot apply for a lifetime mortgage or other equity release plan because you are not at least 55 years old, there are some alternative options. There are loans you might qualify for and some more innovative ideas to create money for home improvements, holidays, medical bills or any other purpose.
Read on to uncover the popular options!
Alternatives to equity release schemes (if you’re under 55)
Can you get equity release under 55? No, but here’s the alternative options. Below you can find five alternatives to equity release if you are under 55.
- Second charge mortgages
A second charge mortgage is an umbrella term for any additional loan applied to a property with an existing first charge mortgage. For context, a first charge mortgage is a long-winded name for general mortgages used to help buy residential property. So, if you add another secured loan to your home based on your home equity, this is a second charge mortgage.
Second charge mortgages are available to people of all ages as long as they can afford repayments. They are mostly taken up by younger homeowners wanting to release some of the home equity they have built up through regular first charge mortgage payments. The money can be used for any purpose, but is usually used to make home improvements, which can subsequently increase property value and home equity again.
Home equity loans
Home equity loans provide the homeowner with a loan as a lump sum that is charged with a fixed interest rate. The loan along with the interest must be repaid each month for a fixed duration so that the loan is cleared. They can be a beneficial way to borrow larger amounts than what is available through personal loans and credit cards, while also getting a competitive interest rate.
Home equity line of credit (HELOC)
A home equity line of credit is the same as a home equity loan but they do have some key differences. The first and biggest difference is how the money is paid out. The money is available through instalments over a draw period, which may be as long as two years. During this time, the homeowner only has to make interest repayments. After the draw period ends, both capital loan and interest repayments are due each month until the loan is repaid. With a HELOC, the interest is often charged at a variable rate instead of a fixed rate.
- Remortgaging to release equity
Instead of adding a separate secured loan to your home, another option is to extend your current first charge mortgage. Either with the same lender or another one, you could switch your current mortgage for another one while simultaneously borrowing some more against your home equity.
For example, let’s imagine you have a £200,000 home with a £100,000 existing mortgage. You then swap your current mortgage for a new one by asking to borrow £130,000. The first £100,000 will be needed to repay the original mortgage deal, and then an additional £30,000 is borrowed against your home equity and repaid within the mortgage repayments. This £30,000 can be used on anything you wish, such as a new kitchen, holidays, etc.
- Downsizing your home
Downsizing from your current home to another one will help to create a savings nest egg. If you urgently need money, this may be a good option before returning to the idea of equity release. And if you manage to create a sizable pool of money by downsizing, you may even be able to delay using equity release longer and get a better deal.
Just remember to consider the other fees, costs and stress associated with moving home, such as legal fees and stamp duty.
- Rent out a room in your home
If you do not want to downsize, another option is to rent out a room or part of your home until you are able to release equity. Doing so will create a continuous income stream and could tie you over until you reach 55 and can use an equity release plan. Or you may decide that renting a room out is even better than equity release for your circumstances.
Keep in mind that the money you receive needs to be declared to HM Revenue and Customs and is subject to tax.
- Start saving smarter
Until you meet the age requirement of equity release, you could try making the money you do have stretch further. MoneyNerd has scores of guides and resources available to help your budget, track and save more. And if you’re dealing with debts and arrears, you could benefit from reading our debt solutions page.
What is the best alternative to equity release?
Out of all the alternatives to equity release, there is no single alternative that is always the best. A wide range of factors should be weighed into your decision. You may want to get financial advice before proceeding.