Older people are sat on an enormous amount of equity in their homes. Data from Key Retirement earlier this year suggested that pensioner property wealth jumped by more than £37bn in 2017 to top £1trn.

Traditionally, they would give their loved ones a helping hand by passing that cash onto them after they pass away in the form of an inheritance.

But equity release allows these homeowners to tap into that property wealth and effectively unlock some of the equity they have built up in their home which they can then gift to their loved ones.

More, others are using it to try and ensure they aren't caught out by inheritance tax, and as a way to supplement thieir pension without going through the rigmarole of moving home.

How does equity release work?

With a lifetime mortgage, the loan is only repaid when the property is sold on after you die or move into care. (
Image:
Getty)

Equity release schemes come in two main forms: lifetime mortgages and home reversion schemes.

Lifetime mortgages are by far the most popular form of equity release deal, accounting for almost the entire market.

With a lifetime mortgage, you borrow a portion of the property’s value. While you are charged interest on this loan, you don’t have to make any monthly repayments.

Instead the loan is paid off when the property is sold after either you pass away or move into long-term care.

Lifetime mortgages are generally available from the age of 55, and you can choose to either borrow a single lump sum or go for a ‘drawdown’ version where you can access the money in stages as and when you need it.

The other type of equity release is a home reversion plan. This is where you sell a portion of your home to the lender, though you retain the right to stay in the property until you die.

When the property is sold after you die or move into care, the lender then gets the same percentage of the sale price. So if you sold 50% of the property to a lender, then they will get 50% of the proceeds of the sale.

How much equity can I release?

Because lenders have pledged that you will never owe more than the eventual sale price, they are more strict on the maximum loan-to-values they will offer than is the case with traditional mortgages.

It will vary depending on the lender, but very few lenders will offer you a loan worth more than 50% of your property’s value.

Is equity release safe?

Many equity release lenders only offer their loans through independent financial advisers

There was a time when equity release had a dreadful reputation, with all sorts of horror stories about loved ones being left with large debts after the homeowners passed away.

Things have greatly improved in recent years though, in part because of equity release lenders agreeing to a set out standards outlined by the trade body the Equity Release Council .

This includes the fact that all member lenders have signed up to a ‘No Negative Equity’ guarantee. This ensures that when you pass away, your loved ones will not be left to pay off your loan - it will be cleared in its entirety by whatever is raised from the sale of the property.

Another point to remember is that lenders only offer their equity release plans via independent advisers.

You’ll need to sit down with an adviser and go through your circumstances so that they can work out what deals best meet your needs - it’s not like you’ll be sweet talked into a loan that is ill suited to your circumstances.

Is equity release a good idea?

Equity release isn't for everyone (
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Getty Images)

While there are a number of positives to be had from an equity release loan, there are plenty of potential downsides to bear in mind as well.

For starters, it’s important to note that the interest rates on offer are higher than those from traditional mortgage deals. It may work out cheaper for you to remortgage rather than go for an equity release deal, so long as you can find a lender willing to lend to you in your later years.

It’s also a lifelong commitment. If you change your mind and want to repay the loan early, there will be significant early repayment charges that you will have to cover as well as the cost of the loan.

That said, some lenders are now looking to launch equity release products which allow you to make some repayments when you are able in order to reduce the size of the debt ahead of the property eventually being sold.

If you are thinking about equity release, then it’s really important that you discuss it with your loved ones as it will erode - and potentially entirely eliminate - any inheritance you might have liked to pass on, and which those loved ones may have been relying on.

This is less of an issue if you want to use equity release in order to pass on gifts to your family members before you die, but it may be less well received if it’s to cover the costs of a big holiday.

How long does equity release take?

When will the money reach you? (
Image:
PA)

 

The process for taking out an equity release plan can be quite protracted, and as a result it may be some time before you actually have the money to spend as you wish.

The first stage will be arranging a chat with a financial adviser to work out whether equity release is your best option and what sorts of deals you might qualify for. They will then provide you with their recommendations and Key Facts Illustration documents for you to go through.

Once you have selected a product, you will need to make a formal application.You’ll also need to appoint a solicitor to handle the legal side for you.

As with a traditional mortgage, the lender will want to arrange a valuation before proceeding. Once this is sorted you’ll be sent a formal offer letter, which you will need to have a face-to-face meeting with your solicitor to discuss.

Once you sign the paperwork, the money should be with you inside a week or two, though getting to that point can easily take eight to ten weeks.