Four alternatives to equity release

The number of companies specialising in equity release and promoting its benefits for cash-poor, property-rich pensioners in TV adverts has rocketed over recent years. If you’re a homeowner aged 55 or older, you can use equity release to access money tied up in the value of your property without having to sell it.

Equity release adverts may focus on this cash funding the holiday of a lifetime or home improvements, or helping children onto the property ladder, but the money could also be used simply to boost your income.

According to the Equity Release Council, the number of equity release products available has more than doubled over the past two years, growing by 109 over the second half of 2020 and increasing by 29 per cent from 379 in July 2020 to 488 in January 2021.

Equity release may appeal given the impact of the pandemic on older people’s finances. Companies have stopped dividend payments and savings accounts pay dismal interest rates, but property wealth has held up well with prices continuing to rise in many parts of the country.

Lifetime mortgages, the most popular type of this product, secure a loan against your property to release money and many lenders offer rates of around 3 per cent. The loan is repaid on death, sale of the property or moving permanently into care, when compound interest is added to the amount owed. Alternatively, home reversion plans can be used to sell all or part of your home for less than the full market value to an equity release provider. 

For some retirees, equity release could make sense and the products are better than they used to be, but it’s not for everyone. It can leave your estate with substantial bills because of the impact of compounding over decades. “If you want to have anything left to pass onto loved ones equity release can be a nightmare,” says Richard Harwood, divisional director - financial planning at Brewin Dolphin.

You need to seek professional financial advice if you plan to use equity release. Other drawbacks to watch out for include early repayment charges and limits on your future options such as downsizing, although plans are increasingly flexible. 

But there are a variety of alternatives that may offer more efficient ways of releasing money to supplement your income or raise a lump sum.

Taking money from a flexible pension

Since pension freedoms were introduced in April 2015, you have been able to use your retirement pot as you wish, including making full use of flexible drawdown. You can access up to 25 per cent of your pension from age 55 free from tax, with the remainder subject to income tax. Money can be withdrawn gradually as an income or an occasional lump sum.

Carefully managing withdrawals can plug income gaps until, for example, you reach state pension age. “But you need to be careful as you may live longer than you think,” warns Harwood. A cash flow forecast from a financial planner can help to determine how much money to take from your pension, and when, to help you avoid running out of money.

“You should be careful of using high levels of capital in the early years of retirement given the chance of having to pay for your own care one day,” adds Hannah Edwards, managing director of Eva Capital Management. “But over two full tax years you could unlock a six-figure sum from your pension and only pay 20 per cent basic-rate tax on part of the withdrawal.”

Remember to apply for your state pension too as this isn’t an automatic payment, or you risk missing out on your entitlement.

Downsizing to release equity

If you’re reliant on wealth tied up in your property to fund retirement, downsizing is another popular option. Moving to a cheaper property may release a lump sum from your home and should be considered before going down the equity release route.

Kay Ingram, chartered financial planner at LEBC Group, says: “Instead of using your home as collateral for a lifetime loan, selling it could be a better option - particularly if it’s larger than you need, and comes with high energy bills and maintenance costs.”

Yet moving away from an area where you’re settled may not appeal - whatever the financial benefits. And releasing funds from a property sale can take time, and involves additional costs such as stamp duty, and solicitor and survey fees. You may not release as much money as you expect.

“Unfortunately, there is a shortage of suitable accommodation as bungalows and retirement flats are scarce," adds Ingram. "So the difference in price between a family home and smaller property may not be that great.” 

Maximise your cash and investments

If you’ve got a large amount of cash set aside or your investment portfolio is largely growth-focused, you could refocus this money on income-producing funds and shares. Ideally, throughout your working life you should have accumulated a variety of accounts including cash and individual savings accounts (Isas). “But you don’t want to take more risk than necessary,” says Harwood.

Alternatively, there are other, flexible ways to borrow using an investment portfolio. “Banks and building societies will lend against a portfolio of assets,” says Edwards. For example, a client with £500,000 in Isas might borrow against them to secure a mortgage of £250,000. “This may be invested for income over a 10-year term or even used to buy an annuity,” she explains. “Known as asset-slicing, the rates on offer are far lower than an inflexible equity release plan.”

She adds that this option may suit someone who wants to downsize at some stage, but isn’t yet ready and wants to increase their income.

Using an unsecured loan

You could borrow between £25,000 and £50,000 using a personal loan which is repaid over a period of one to seven years. You will repay your debt in a relatively short amount of time compared with a mortgage or equity release plan, which could save you money in the long term. You also leave your home out of the process and rates are currently low at around 3 per cent. However, the rate you’re offered will depend on various factors including your credit history and the amount you’re borrowing.

Renting out a room

You can boost your retirement income by renting our your spare room under the government’s Rent a Room scheme. This enables you to earn up to £7,500 a year tax-free, provided the room is furnished.

“Finding a suitable lodger could be achieved by linking with a university or hospital which is often looking for accommodation for visiting academics and clinicians,” says Ingram.

You don’t have to declare this income on a tax return as this exemption is automatic unless the rent exceeds the tax-free threshold. “I’ve known renting a room to be a vital source of income for clients not ready to downsize,” adds Edwards.

Retirement interest-only (RIO) mortgages

If you’re an older homeowner and want to release some of the equity you’ve built up, but also avoid interest racking up over decades, retirement interest-only mortgages are an option. Lenders are increasingly offering these deals to borrowers aged 55 and over who are typically unable to access standard mortgage deals.

“But long-term affordability of a RIO mortgage is important and it is necessary to consider the position of the survivor of a couple who could see household income fall on the death of a partner,” stresses Ingram. A life insurance policy could be put in place to ensure the loan is paid off in this scenario, she adds.