Do you want to unlock property wealth? Read the essentials you need to know first

The number of homeowners turning to equity release to boost their finances is on the rise. While accessing property wealth can be a useful way to supplement your other income, there are things you need to consider first.

Equity release provides you with a way to access some of your property wealth while still being able to live in your home. As the cost of living soars due to inflation, figures suggest more homeowners are using equity release to cover costs.

According to figures from the Equity Release Council, the number of new equity release customers increased by 34% when compared to a year earlier in the third quarter of 2022. The number of returning customers accessing further property wealth increased by 49%.

When using equity release, you can choose to access a lump sum or use a drawdown plan, which allows you to make further withdrawals in the future. The average lump sum taken out is £133,770, while the average initial withdrawal for a new drawdown plan is £88,340.

How much you could access through equity release will depend on the value of your home and your age.

The average property is worth £280,000 – your home could be one of your most valuable assets

As people are facing ever-rising costs, it’s easy to see why equity release is becoming more popular; with property prices soaring, your home could be one of your most valuable assets.

According to the Halifax House Price Index, the value of the average home increased by 2% over 2022 to more than £280,000. That means accessing property wealth could provide a significant boost to your finances later in life.

You can usually access between 20% and 60% of the value of your home through equity release. If you have a mortgage on your home, you must usually pay it off with the money you’ve accessed.

Equity release providers will often have a minimum age for customers, such as 55.

So, if you’re thinking about equity release, how does it work?

The most common type of equity release is a lifetime mortgage. Essentially, it’s a loan taken out against your home, but you don’t need to make repayments. Instead, the interest can be rolled up and paid when you pass away or if you move into long-term care. You won’t need to pay Income Tax on the money you receive through equity release.

You can use the money you access through equity release how you like. It could be used to clear existing debt, support your day-to-day living costs, or pay for large one-off expenses.

If you’re looking for ways to boost your income, equity release could make sense. However, there are crucial drawbacks you need to understand first.

5 potential drawbacks of equity release you need to think about

1. It may not be a sustainable way to boost your income

If the cost of living pressures mean you’re looking for ways to boost your income, you should consider if using equity release will meet your needs. Would the money you withdraw provide you with long-term security?

Set out what you want to use the money you hope to release for and review your other options. It may be that equity release isn’t right for you and, instead, adjusting your plans, depleting investments, or another option makes more sense.

2. If you don’t make interest payments, the amount you owe can quickly rise

In many cases, you can choose whether to make interest payments when you’ve used equity release. Not making any payments can help your day-to-day budget stretch further. If you’re retired, this can be particularly useful.

However, if you don’t make payments, the interest means the total amount you owe increases. As the interest is calculated based on the total amount you owe, the interest due can drastically rise over time.

It means the total value you owe when you pass away or move into long-term care can be significantly higher than the amount you originally borrowed.

3. It could significantly reduce the inheritance you leave to loved ones

Do you want to leave assets behind for your children or other loved ones? If you do, calculating the effect equity release could have is vital.

You will not be able to leave your home to loved ones if you’ve used equity release. As it’s likely to be among your largest assets, that means what you leave behind could be considerably less than you expect. The lender will sell your home to pay the outstanding debt, and what remains will be passed on.

If you decide to use equity release, you should ensure it has a “no negative equity guarantee”. This means that the value of the loan, including interest, cannot exceed that of the property. As a result, it preserves other assets, which can then be passed on to your beneficiaries.

4. It may reduce your options later in life

If you use equity release, you will not normally be able to secure another loan against your home. It could also make it more difficult to move, especially if you want to downsize. You should consider what your long-term plans are and how equity release could affect them.

5. It could affect the means-tested benefits you’re entitled to

If you’re entitled to means-tested benefits, accessing money through equity release could mean you’ll lose them. This is because the value of your estate or savings may exceed thresholds. Make sure you understand how using equity release could affect other sources of income or allowances before you proceed.

Contact us to talk about equity release and your options

Please get in touch if you’re thinking about using equity release. We can help you explore all your options and understand which could be appropriate for you.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.