What are the main alternatives to equity release in the UK?
What are the main alternatives to equity release in the UK?
There are five main alternatives to equity release: a retirement interest-only or standard mortgage, downsizing, drawing on your pensions and savings, help from family, and the benefits or grants that often go unclaimed. None of them leaves interest to build up unpaid against your home, which is what makes a lifetime mortgage, the most common form of equity release, expensive over time. If you borrowed in your sixties and paid nothing towards the interest, the amount owed when your home was sold could be a good deal larger than the sum you took.
Most people asking what the alternatives are have the same underlying problem: their money is in the wrong place. Their house is worth a great deal and their income is not what it once was. The gap between the two shows up in ordinary ways: a car that has finally given up, a bathroom that needs to become a wet room, an interest-only mortgage reaching the end of its term or a daughter who cannot get a deposit together.
In a hurry?
The main alternatives are a retirement interest-only or standard mortgage, downsizing, drawing on pensions and savings, help from family, and benefits or grants you may not have claimed. None of them leaves interest to build up unpaid against your home. Which one fits depends on what the money is for, how long you need it, and whether you can afford to pay something each month.
Speak to a specialist adviser →People retire now with more of their wealth in property and less in guaranteed pension income than the generation before, so their house has to do work a pension used to do. Lenders and advertisers saw that coming before most homeowners did, and an industry has grown up around it. Even so, plenty of people make one of the biggest financial decisions of their lives on the strength of a television advert.
Which of these makes sense depends less on the product than on three questions: what the money is for, how long you need it to last, and whether you could pay something each month. Your answers to those questions rule most of the options in or out before a lender is involved.
This article works through the alternatives in turn, and when equity release is still the better answer:
Is there a cheaper way to borrow against your home?
There is usually a cheaper way to borrow against a home than equity release, as long as you can afford the monthly payments, and it is known as a retirement interest-only mortgage. You pay the interest each month, and the loan itself is repaid when your home is sold, when you die, or when you move permanently into care. Because the interest is paid as you go, rather than added to the debt, the total cost over a long retirement is far lower than on a lifetime mortgage where you pay nothing.
The trade-off is the affordability check, since a lender has to be satisfied you can keep your payments up now and in the future. For a couple that means testing what happens if one of you dies and your household income drops. An ordinary mortgage is worth asking about too, because lenders have grown more willing to lend into later life. Equally, if you already have a mortgage, borrowing more from the same lender, known as a ‘further advance’, is often simpler than starting again elsewhere.
There is also a middle route, because the Equity Release Council standards require lifetime mortgages to allow voluntary repayments without penalty, subject to the lender's criteria. That lets you pay some or all of the interest while you can afford to, and stop when you want.
It is worth remembering that with any lending that carries monthly payments, your home is what secures the loan, and it can be repossessed if you do not keep them up.
Does downsizing free up as much as people expect?
Downsizing often releases money without any borrowing at all, though it is usually less than the gap between the two asking prices suggests. The gap is a gross figure, and the costs of moving come out of it: the estate agent, the solicitors, the removals, the stamp duty and the inevitable work on the new place.
Furthermore, the gap between a family house and a decent smaller one in the same town is often narrower than people expect, particularly where the smaller one is a newer flat with a service charge. Moving further afield often widens the gap, but it takes you away from the doctor, the shops and the people who make later life manageable. However, smaller homes often have reduced running costs, and the savings continue year after year.
Compared with borrowing, downsizing settles the problem rather than postponing it, with no interest and no debt against your estate. Against that, moving is exhausting, expensive to reverse, and hard to face when it means leaving a house you have lived in for forty years, which is a real cost and deserves proper thought.
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Join our readers →Could the money come from somewhere other than your home?
It is worth stating the obvious that the additional money or income you need can often come from somewhere other than your home. Pensions, ISAs, general savings and investments are often quicker to reach and leave your home alone. The order in which you draw on them affects how long your money lasts and how much tax you pay.
The order matters for another reason too, because selling investments after a market fall turns a paper loss into a permanent one, and running savings down to nothing removes the buffer that would have covered care costs. Our article on funding long-term care sets out what those bills tend to look like.
Funding your family tends to be the last option people mention, but it is worth looking at early. Children who expect to inherit your home are, in effect, the ones paying the interest on any borrowing secured against it, and many would rather lend or give the money directly. There is no interest to pay and your home stays clear of debt. However, a loan or a gift like this needs careful consideration, and larger gifts can carry consequences for inheritance tax and for a later care assessment, depending on the timing.
What can you claim without borrowing at all?
Some of the income or capital shortfall that causes people to borrow against the value of their home could actually be claimed instead. One such option is Attendance Allowance, which is widely underclaimed. It goes to people who have reached State Pension age and need help looking after themselves, or someone to keep an eye on them for their own safety. There is no means test, and you do not need a carer in place to qualify. Claiming it can also lead to extra Pension Credit, Housing Benefit or a Council Tax reduction, and in Scotland the equivalent is Pension Age Disability Payment.
Where the money is for adaptations rather than income, the council may pay. In England, Wales and Northern Ireland a Disabled Facilities Grant can cover ramps and grab rails, a stairlift, a level-access shower, wider doorways or a downstairs bedroom. For an adult it is means-tested, but it does not affect any other benefits you receive. Scotland handles adaptations through its councils under separate rules.
Letting a furnished room in your own home is another route, with rental income tax free up to an annual limit under the Rent a Room Scheme.
It is important to remember that any means test works both ways and the money released from a house stops being property wealth and starts being classed as savings or investments. Savings above a certain level count against means-tested support in a way the home you live in does not, so equity release can actually reduce Pension Credit, a Council Tax reduction or help from the local authority. Certainly something worth keeping in mind.
When is equity release still the right answer?
Equity release is not always a last resort, and it should not be dismissed out of hand, because it asks nothing of your monthly income. If you cannot pass an affordability check, a retirement interest-only mortgage is not open to you, and equity release may be the only way to take money from your home without selling it.
Lifetime mortgages carry more protection than their reputation suggests. Where a plan meets Equity Release Council standards, the rate is fixed or capped for life, and you can stay in your home until you die or move permanently into care. Moreover, subject to the lender's criteria, you can take the loan with you to another suitable property and make repayments voluntarily without penalty. Equally, neither you nor your estate will owe more than your home is worth when it is sold.
None of these benefits makes it particularly cheap, though. Interest left to build up takes a larger share of your home each year. However, taking the money in stages rather than one lump sum slows that considerably, as interest only runs on what you have drawn. So it is worth looking properly at everything above before committing.
Weighing up equity release against the alternatives?
Our advisers are qualified in both mortgages and equity release, so they can compare the two properly and cost them over the years they would actually run. Find out how we work with clients across the UK.
Equity release advice →What's next?
Which of these alternatives is right for you is rarely obvious at first. It all depends on your income, your health, what the money is for, how long you are likely to stay in your home and what you want to leave behind. Someone qualified in both mortgages and equity release can put the options side by side and cost them over the years they would really run.
Our Chartered Financial Advisers offer a free initial consultation to anyone who wants to weigh up equity release against the alternatives.
We work with clients across the UK. Locally, we advise clients throughout Kent and East Sussex, including Tunbridge Wells, Sevenoaks, Maidstone, Tonbridge, Crowborough and Eastbourne.
This article is for general information only and does not constitute personal financial advice or a recommendation. The suitability of any investment approach depends on individual circumstances, objectives and the current regulatory environment. Tax treatment and investment rules can change over time, and their effect will depend on personal circumstances. Investments can go down as well as up, and you may get back less than you invest. Your home may be repossessed if you do not keep up repayments on your mortgage. Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. Always ask for a personalised illustration before proceeding.
