Older people who need cash can release the money locked away in their property by taking out what is called an equity release plan.
With one, you get a loan which is paid off via the sale of your home after you die.
Equity release plans come in two forms:
Lifetime mortgages
Here, you take out a loan which you can draw in one go or gradually over time.
It is repaid, plus interest, from the sale of your property on your death, or when your surviving spouse dies, which means your surviving partner can continue to live there.
Interest accumulates from the day you take the loan to the day it is repaid. If you take the cash in stages, it is usually cheaper because most lenders only charge interest on your balance as it stands each day so if you delay drawing some money, you keep your balance lower for longer.
Home reversion plans
Here, you sell part of your property in return for a lump sum. When you or your surviving partner dies, the lender gets a pre-agreed proportion of the money from the sale of your property.
What are the risks?
As life expectancy continually increases, it means you could be paying interest for a considerable period, which could add up to a large sum, so you may have little cash to leave as an inheritance.
It also means those who take out a plan too early in their lifespan may pay a large sum of interest. Many experts suggest waiting until at least your 60s.
If house prices fall, it may also leave your kids with little inheritance as a huge chunk of the sale price may go to pay off the debt.
Most lenders guarantee you will never have to pay back more than the value of your home even if the sale price is less than what you owe.
Should you take an equity release plan?
Most experts suggest you speak to your family and consider downsizing (selling your home for a cheaper one) before committing to equity release.
As there are big risks to taking out an equity release plan – but also gains by having access to cash – it’s always worth seeking advice from a broker.
In fact, it can even be cheaper to go via a broker as lenders sometimes offer marginally better rates to those who use a middle man.
