There are various alternatives to equity release which you may find more useful when looking to extract capital from your property. Not all alternatives to equity release may be suited to you so independent financial advice from a mortgage broker or Independent financial adviser may be relevant to you.
What is equity release?
Equity release is when you release the equity in your home through a one-time payment, regular payments or both. You can only do an equity release if you are over 55. The funds are given to you by an equity release mortgage lender and you do not have to pay them back as they are recouped upon your death by selling the home.
What are the alternatives to equity release?
Some of the alternatives to equity release include:
Downsizing your home:
If you already have a home with a lot of equity tied up in it then it may be a good option to simply sell your house and buy a smaller one especially if your kids have moved out and you have empty rooms.
By doing this you will have access to a large pot of cash from which you can live off.
You should bear in mind that there will be other costs associated with moving home such as stamp duty, estate agent fees, mortgage application fees, conveyancing fees etc.
Downsizing your home may not be an alternative to equity release for everyone. At first, you will need to have enough equity in your home which is sufficient for you to buy a new smaller house if not you may need to find a mortgage to pay for your new home and most mortgage lenders have restrictions on the age of the borrowers they lend to.
If you need to get a mortgage you will also lose out on the benefits of being a cash buyer which will allow you to negotiate and get a better bargain from a home seller.
Downsizing after an equity release
All equity release Council plans must include portability with a downsizing protection option to enable equity release borrowers to downsize (typically after 5 yrs) and repay without any early repayment charges.
You should also be able to switch equity release providers if your equity release is a lifetime mortgage.
The process is very similar to switching mortgage providers for a better rate and lower monthly payments.
Depending on when you took out the lifetime mortgage and what type of deal you entered into, switching can be a way to save money if you’re out of contract and find a better rate.
Ask your family for financial assistance:
The main concern for most people when thinking about equity release schemes is that they will not leave much money behind for their family. An alternative to equity release schemes could simply be to ask for your family to help during financial difficulty.
One of the only ways you can ensure your family gains most of your property as an inheritance upon your death is by preventing the amount of interest which is accrued with an equity release scheme or prevent getting into an equity release scheme in the first instance.
For these reasons, family members are more likely to want to assist in preventing much of the home end up with the equity release provider and will be more likely to help.
Use the Governments rent a room scheme:
You could simply take in a lodger by using the governments rent a room scheme and benefit from a £7.500 tax-free income annually. Even if you aren't eligible for the rent a room scheme the income you earn may be sufficient to help you.
If your home is mortgaged, ensure you have checked with your mortgage lender to ensure you aren't breaking the terms of your mortgage agreement by taking in a lodger.
If you rent from the council or recently bought your home using the right to buy, preserved right to buy or the right to acquire scheme then you should ensure you check with your council or landlord before taking in a lodger.
Use other means of finance:
You may be able to borrow from your credit cards, get a secured loan on your property or get an unsecured personal loan. Although some of these methods of finance may prevent you from borrowing for a long period of time depending on your age, credit score and current income, some may be suitable for you and may represent better value over your term of borrowing than with an equity release scheme.
Reduce your living costs:
The first reason why many people will seek an equity release scheme is that their current living expenses are probably too much in comparison from whatever income they may be receiving from businesses or their pension.
A possible solution to this problem which may be an alternative to an equity release scheme will be to cut down on your current living expenses.
This could mean refinancing your car, remortgaging to a better rate (if your home is mortgaged), refinancing your personal loan, switching to a cheaper credit card, switching your broadband, switching your electricity and gas supplier etc
Obtain a grant for home improvements:
If you are looking to use an equity release scheme as financing for any home improvements you want to make on your home then you should look to see if you can obtain financing from your local council as an alternative to equity release.
You may be able to obtain financial help from your local council if you are looking to fit a lift or cavity wall insulation in your home. You will usually need to be a low income household for any grant funding to be available to you.
Use your investments and savings:
Your investments and savings could be used as an alternative to equity release schemes if you currently have any investments or savings.
If the adviser feels that you should possibly use savings or investments you already have which may save you thousands of pounds in interest over the next few years in comparison to an equity release scheme then they will let you know.
By doing this you are essentially pushing back the need for an equity release a few years back and saving yourself some money.
Apply for eligible benefits:
There are many benefits which you may be eligible for based on your income, where you live, your age etc. You should always check to see you have claimed all benefits which you are eligible for as this could boost your oncome and be a good alternative to equity release.
You may be eligible for benefits such as pension or savings credit, council tax reduction or even disability benefits.
Go back to employment:
An alternative to equity release schemes could be to simply go back into employment or start a part-time job or business. This will mean you can earn extra income to help you and prevent you from needing an equity release scheme at least for a year or so.
Get a standard remortgage:
Not all mortgage lenders will lend to people over 75 but if you are under the age of 75 then you may be able to get a standard remortgage where you essentially extract equity out of your home without having to use an equity release scheme.
You should seek the advice of a mortgage broker, an independent financial adviser and maybe a legal advisor before you do this.
Remortgages will incur costs such as conveyancing fees, mortgage fees, stamp duty etc.
Note: mortgage lenders don't just look at your age when you take out the mortgage but your age upon when the mortgage term should ideally end.
To be eligible for a remortgage you will ideally need a good credit score, if not you should look to build credit, a sizeable mortgage deposit or equity and some regular income. You may also be eligible for interest-only mortgages if you find it difficult to get a standard remortgage.
Use a retirement interest only mortgage:
A retirement interest-only mortgage is a more flexible product and an alternative to equity release schemes. Retirement interest-only mortgages are less strict than interest-only mortgages as the mortgage lender does not have strict guidelines on the repayment method or vehicle.
Retirement interest-only mortgages can be repaid in three ways:
- By making interest repayments throughout the term of the mortgage and the capital is recouped at the end of the temr when you die or move into a care home.
- By making interest and capital repayments throughout the term of the mortgage
- By deferring all interest repayments to the end of the mortgage at which point the home is sold to recoup the interest plus capital owed to the mortgage lender.
Some disadvantages of retirement interest-only mortgages:
The market is relatively small, meaning there isn't much competition and therefore interest rates are high.
There are also products which sit in between equity release and a retirement interest-only mortgage. One of these is the optional payment lifetime mortgage launched by legal and general.
This lets customers pay some or all of the monthly interest, but also allows them to stop paying whenever they like and add the interest to the mortgage.
You will have to pass the mortgage lenders affordability test when seeking a retirement interest-only mortgage.
Some FAQs on alternatives to equity release:
Is equity release a safe option?
Most equity release providers and mortgage advisers are members of the Equity Release Council, this means they must adhere to a strict code of conduct designed to protect consumers who seek equity release as an option. Safeguards include: “no negative equity”. This makes equity release somewhat safe.
A “no negative equity guarantee”, means you will never owe more than the value of your property.
What is the downside to equity release?
When you borrow money from an equity release provider you commit to paying interest on the money you borrowed. The longer you borrow, the more interest you will pay. Most equity providers are members of the equity release council and commit to a no negative equity guarantee. This means the interest you owe will never surpass the value of your home but this also means at the time of your death you could have no equity in your home.
Another downside to equity release could be the limited amount of equity you may leave behind or the fact that your family could get nothing when you die as you owe the complete value of your home in interest to the equity release lender.
The final disadvantage of an equity release scheme is that you won't fully benefit from any increase in the value of your home as you will have to pay some of this out to the equity release provider upon your death.
What are the criteria for equity release?
The criteria for equity release is a minimum age of 55 and homeownership of a property valued at £60,000 or more. This is the basic criteria but many providers could have different criteria for their equity release product.
Consult an equity release advisor.
How much can I release from my house?
Most equity release lenders will let you borrow up to 50% of your property value as either a cash lump sum or income however the average is around 35%. Most equity release providers will also charge you 5% of the amount you release as a fee.
Which equity release is best?
There isn't a single best provider of equity release. This will be based on your circumstances and for this reason, you should seek independent financial advice from an equity release advisor.
Is there an upper age limit for equity release?
There isn't an upper age limit for equity release but you will have to be at least 55 to release equity from your home.