Equity release - can someone explain it to me please?!

[Moirarosesgarden]

We have no children or anyone else who we would want to leave inheritance to.

We are 45 and 47 and should be able to pay off our mortgage in the next 3 years and will have an asset worth circa £500k. Next focus will be building pension pots which I think will sit at around £100k each by age 55.

At what age can we do equity release and how does it work in simple terms?! Would equity release and our pensions give us enough to live off comfortably if we wanted to retire at 55? Is there an easy way to work out how much this would give us?!

This suggests you can do it from 55. Comfortably depends on what sort of lifestyle you intend to lead tbh. There’s a difference between eating nice food at home and days out, or eating out twice a week and travelling abroad 4 times a year.

https://www.ageuk.org.uk/siteassets/documents/factsheets/fs65_equity_release_fcs.pdf

We looked into it recently. On a 500k home you can release a max of 150k. You can’t apply till you are 55+. You can make payments if you want in order to stop the repayment being too high. There is a cap though and you can’t apply till specify that you still want to leave a small % somewhere else (obviously this will change how much you can raise) and it can be ported to a new property if you want to move. I imagine these details are pretty similar for most companies.

Definitely will be the former. We are content with our dog and mainly uk holidays now. Eating out once a week max but nice food at home. Will take a look at that info thank you :)

Thank you. I will read more into it but can you explain in simple terms as these things confuse me, but why only £150k?! What about the other £350k value, can that not be accessed by us?! (Sorry prob a stupid question!)

AFAIK the other £350K will go to pay the interest on the £150K lump sum they'll give you. It's basically taking a £500K house and turning it into £150K. It's the opposite of a mortgage. Unlike a mortgage where the capital is gradually paid off, you'll always owe interest on the full £150K (unless you make payments but if you could afford to do that, why would you be doing the equity release in the first place?) They won't call the loan in until you die though.

Also bear in mind that this will chip away at the equity you have, such that if you want to downsize in 20 years time you might not be able to afford to buy a smaller property. The value of your current property may go up, but so will the cost of a property you might want to buy.

I guess it works well for some people, but it's worth checking very carefully.

Better off selling the house and purchasing a cheaper home. Equity release heavily benefits the bank.

I would split your efforts between paying off mortgage and building pension, rather than mortgage then pension, it will give the pension much longer in the markets to grow, plus of course you benefit from the tax relief. (Unless your mortgage is a horrifically high interest rate).
Equity release isn't usually a good idea at such a young age. I would suggest tracking your expenditure and working out a retirement budget. Then working out where to get that money from, year by year.
Worth checking your SP forecasts too to make sure you're on track for a full one at SPA, pop that into your year by year tracker too.

You need to factor in the interest which is compound. £150,000 at 6% = £9000. It is then 6% on £159,000. As you can see the interest increases quickly!

This. Definitely this. Based on an older relative’s experience, I think it’s fine if your in the last year or two of your life. But if you anticipate living for several years, you’d be much better off selling and buying somewhere smaller, as the interest racks up.

My relative released around £40k from a property which eventually sold for around £105k (would have been double that if it had been properly cared for and updated). The value of her estate when she died around 10 years later, after the equity release company was paid off? Around £30k. For each pound she released, she paid almost two back. And the interest racks up until it’s sold. It doesn’t get frozen when the person who borrowed the money dies.

If you’re in a couple and one of you dies, you could find yourself in a situation where the survivor can’t afford to sell and buy somewhere else because of the amount owed.

I would avoid it like the plague.

Thanks all… lots to think about! Including whether to continue paying extra off the mortgage. We prob would be better off putting more into pensions now but having the satisfaction of paying off our mortgage is something I just really want to enjoy, psychologically, sooner rather than later!

As above avoid if you can
Fil took out £100k and blew on cruises and crap
a few years later the amount owed is over £200k and compounding up
i would guesstimate they still have a good few years in them so a £500k house that they owned with no mortgage has now become a trap as even if they wanted to downsize they cannot afford anything locally

If paying if the mortgage means that much why on earth would you consider giving someone else a charge on your house?

I agree with this

Because we have no one to leave if to so would rather enjoy the £££ tied up in it ourselves in retirement.

however downsizing sounds like it might be the better option anyway.

We prob would be better off putting more into pensions now but having the satisfaction of paying off our mortgage is something I just really want to enjoy, psychologically

getting free money from the government through putting extra in the pension is far more satisfying to me. If you put an extra £100 in your pension each month - the government gives you £30 and so your take home pay is only £70

You would get much better value for money downsizing and investing the equity you have released that way.

£70 less that should read - sorry

I would avoid equity release if you can. Much better to downsize and release capital that way.

I agree that putting money in your pensions should be the priority.

If you do equity release quite young like 50's its basically taking a mortgage over a 25-30 year term and not paying anything back so the monthly payments and interest are just stacking up and up until the amount of the debt is several times the cash you actually got.

I get that you have no kids but it will severely restrain what you can do with your house in terms moving / downsizing etc. Often if you want to move you have to "buy out" the equity release with big fees for ending the arrangement early leaving you with not enough cash to buy anywhere.

I think it can be a good idea but generally for older people who really need some cash rather than as a general retirement plan.

By paying off the mortgage you ARE tying money up in your house. Just to borrow it back again at a higher rate with worse terms? It doesn't make sense.

It really sounds like you would be better off saving any spare cash into.pensions and S&S ISAs, then drawing.those down to fund an early retirement.

Best thing my sister ever did for me was recommend her financial advisor to me. (She's very sensible.) Maybe see if you can find a good one? Good luck.

Someone I know is stuck in a house they are unable to sell, because they did equity release. When her husband was alive they bought a largish house in quite a rural area. Now he’s dead the house is too big for her and the location isn’t ideal at all but she can’t afford to downsize because of the ER trap.

I recall a thread on here a while back where someone’s mother is also stuck and desperate to move to sheltered housing but can’t because of ER.
i would tread very cautiously.

Yes I think we should do this. Whilst I consider us both intelligent people, and good earners, personal finance is not our strong point! Wish they would teach it in school!

I agree with PPs, why on earth overpay your mortgage now in order to borrow it back from a bank at worse rates. We are in our 50s and don't have anyone to leave our assets to so we actually have an interest only mortgage so we have more money each month to spend on ourselves. Our plan is to downsize in the future using the equity we built up before we switched to interest only.

Me too - and an excellent point about school.

If it helps, mine are independent, Chartered Financial Planners, and CISI accredited. (Other qualifications are available.) At this point, the best thing about them is that they do my tax return for free!