Alternatives to equity release

Whether you’re planning, on the home straight, or already retired, your assets could be the key to unlocking some much-needed money.

You may have heard that equity release or lifetime mortgages are ways to take some cash out of your home. 

But just as the interior of our houses differ, so do our financial needs and goals. So, let’s explore some different options. You may have used some of them before and others may be the lightbulb moment you’ve been waiting for to help you solve your financial puzzles.

Yes – but not always. Equity release is available to homeowners over 55 and is a way to access some of the cash from your home’s value without selling it. You need to know that taking out any type of equity release will mean you will leave a lower amount of inheritance behind to loved ones. It may also have a tax impact and affect whether you’re still eligible for welfare benefits. The most common type of equity release is a long-term loan secured on your home called a lifetime mortgage. This only needs to be repaid after you (and your partner, if you have a joint lifetime mortgage) pass away or move into long-term care.

For some people, a lifetime mortgage is a way to:

• Free up cash that you’re struggling without and boost your retirement income 
• Stay in your current home and keep ownership of it for the rest of your life
• Avoid leaving your family with debt. This is due to the no negative equity guarantee, meaning you’ll never need to pay back more than the value of your home, as long as it’s sold for the best price reasonably achievable. 
• Choose to protect a portion of your home’s value to pass on to loved ones

Of course, like any financial product, it’s not right for everyone. You need to be aware of the downsides:

• As you don't need to make regular repayments the amount you owe will quickly grow. This is because interest is charged on the total borrowing and any interest previously added (compound interest). This will reduce the estate you can leave to loved ones 
• Receiving a cash lump sum could change your eligibility for certain benefits or affect your tax status
• It’s a life-long commitment that can be costly to undo if you change your mind
• There are costs and risks involved, including legal fees.

So, while it can be a good idea, it’s wise to consider all the alternatives to equity release before moving ahead. Here are some other options to think about.

A sensible first step is to take a good look at your household budget. Add up your total income, your essential outgoings, and your other spending, and identify any changes you can make.

Perhaps you can find small ways to cut your spending, like cancelling subscriptions you rarely use or meal planning to avoid food wastage. Maybe you can increase your income a little by claiming all the benefits and allowances you’re entitled to, or by taking on extra work.

If your expenses include making adaptations to your property for health-related reasons (e.g. grab rails or ramps), it’s worth asking your local authority if they’ll provide a grant, or looking for one through a Home Improvement Agency.

Lots of little changes can add up. It might not solve your financial problems entirely, but it will give you a clearer picture of where you stand and what other measures are needed.

Pros:

• Comparatively minor lifestyle changes
• Potential for immediate results
• No costs involved
• Doesn’t take much time

Cons:

• Unlikely to completely solve cash flow concerns

Another useful step is taking stock of anything you have of value (cars, furniture, jewellery, and other possessions) that you wouldn’t mind parting with. This might include things like shares and bonds, if you have any investments.

It doesn’t need to be only very expensive items. Many people are shopping second-hand these days to save money and help the environment, so you could make a bit of money at a car boot sale or by selling belongings online. At the very least, this could give you more time to consider your options.

Pros:

• Possibly fast access to cash
• Potentially minor costs involved

Cons:

• Parting with items you’d prefer to pass on
• Capital gains tax on gains over £3,000

The most direct way to release equity from a house is to sell it and downsize. Moving to somewhere smaller and cheaper, if you can, will provide a cash lump sum and potentially help you save on other household bills too.

Putting your practical needs ahead of your emotional ties to your family home can be difficult but is often, objectively, the best decision for your household.

Pros:

• Potential to raise a significant amount
• Potential ongoing cost savings
• Potential for practical benefits, such as easier household maintenance

Cons:

• Not everyone can downsize 
• Time-consuming
• Major lifestyle change
• Significant costs, including stamp duty

There are two main ways to stay in your home and borrow against its value: remortgaging or equity release. The big difference with remortgaging is that you’ll need to repay it while you’re alive, whereas an equity release lifetime mortgage is repaid after you pass away or need long-term care.

If you own your home outright, you could apply for a new mortgage. If you already have a mortgage, you can remortgage either to increase your borrowing or to extend your mortgage term, which may reduce your monthly repayments.

Unfortunately, not everyone can remortgage. You’ll need to prove that you can afford the monthly repayments, which might be difficult if you’re already struggling to make ends meet. Plus, lenders have age limits, which makes it harder for older borrowers.

Pros:

• No need to move
• Retain legal rights as a homeowner

Cons:

• Monthly repayments will increase your outgoings
• Not certain to be approved
• Costs, such as arrangement fees

Another possibility is to ask your family members for financial help. If you’re reluctant to do that, bear in mind that your decision to release equity from your home would directly impact the people who are set to inherit the property. They might feel that they should be part of your decision and could be very willing to help you now if it means they’ll be better off later.

While you might find the conversation uncomfortable, it’s important to be direct and make everyone’s expectations clear. It’s best to avoid any misunderstanding about whether the money is given as a gift or a loan, or on what terms a loan will be repaid.

Pros:

• Potentially faster than formal loan approval
• Potentially more generous repayment terms

Cons:

• An emotional topic to broach
• Potential to cause family conflicts
• Family members may need to make sacrifices

One more option involving your home is to rent out a room in it. Taking in a lodger might be easier than you think, as it doesn’t involve as much paperwork and regulation as renting out a different property. You’ll just need to make sure your home is safe to live in and kept in good repair, and that you give your lodger reasonable notice if you decide to end the letting.

Pros:

• Extra income every month

Cons:

• Significant lifestyle change
• Tax due on earnings over £7,500 a year
• Minor costs, such as advertising or extra home insurance
• Only possible if you have a spare room

As you can see, all the alternatives to equity release have benefits and drawbacks. There’s no easy solution that’s right for everyone, but if you take the time to explore every option, you can find out what will work for you.

If you decide to move forward with equity release, or if you still need answers to any outstanding questions, you should speak to a specialist. To chat with an equity release adviser about an Aviva lifetime mortgage, call us on 0800 141 3493 or request a call back.