Alternatives to Equity Release: Exploring Your Options to Access Your Property’s Equity
When deciding on equity release it isn’t just about eligibility, you need to also consider suitability. Before you seek out financial advice from a qualified adviser here are a few tips to decide if it is the right product for you.
Page last updated – 1st March 2023
Are you a homeowner looking to access the equity in your property but hesitant about equity release? You’re not alone. While equity release can be an attractive option for some, it’s not the only option available. That’s where alternatives to equity release come in.
By considering alternative options, homeowners can access the equity in their property in a way that better suits their individual needs and circumstances. Downsizing, pension income, remortgaging, home improvement loans, and selling a share of the property are all viable alternatives to equity release, each with its own set of pros and cons.
Downsizing, for example, can provide homeowners with a substantial amount of cash while reducing ongoing maintenance and running costs. On the other hand, selling a share of the property to a third party can provide homeowners with a lump sum or regular payments while allowing them to continue living in the property.
It’s important to carefully weigh up the pros and cons of each option before making a decision. While equity release may seem like the most straightforward choice, it’s important to consider all available alternatives to ensure that you make an informed decision that best meets your individual needs.
That’s why we’ve put together this comprehensive guide to alternatives to equity release. We’ll explore each option in detail, outlining the benefits and drawbacks of each to help you make an informed decision. So whether you’re looking to renovate your home, supplement your income in retirement, or simply want to access the equity in your property, we’ve got you covered.
Downsizing:
Downsizing involves selling your current property and moving to a smaller, less expensive property. This can release the equity tied up in your current property and provide you with cash to use as you wish. Downsizing can also reduce ongoing maintenance and running costs associated with larger properties.
According to research conducted by Legal & General, UK homeowners aged 55 and over are estimated to have £1.8 trillion of housing equity. The research also found that downsizing could unlock an average of £112,000 of housing equity for older homeowners, which could help fund retirement or long-term care costs. Additionally, Legal & General estimates that downsizing could release a total of £312 billion of housing equity across the UK.
Pros: Downsizing can provide you with a lump sum of cash to use as you wish, and it can also reduce your ongoing maintenance and running costs. Moving to a smaller, less expensive property can also free up your time and give you the opportunity to start fresh in a new location.
Cons: Moving to a new property can be stressful and disruptive, and you may have to give up the familiarity and comfort of your current home. You may also have to pay fees associated with selling your property and buying a new one.
Pension Income:
If you’re over 55 and have a defined contribution pension, the new pension freedoms offer the option of taking a lump sum or regular income payments. This can provide you with a flexible and tax-efficient way of accessing the equity in your property without the need for equity release. According to the retirement market income data report carried out by the Financial Conduct Authority (FCA), the total number of pension plans accessed for the first time in 2021/22 saw a notable increase, rising by 18% to reach 705,666, in comparison to 596,080 in 2020/21.
Pros: If you’re over 55 and have a defined contribution pension, you can access your pension pot to provide you with a flexible and tax-efficient way of accessing the equity in your property. You can take a lump sum or regular income payments, depending on your needs.
Cons: If you take a lump sum, you may have to pay a large tax bill, and if you take regular income payments, you may not receive as much money as you would with equity release.
Remortgaging:
If you have an existing mortgage, you may be able to release some of the equity in your property by remortgaging. This can be a cost-effective way of accessing cash, as the interest rates on mortgages are generally lower than those of equity release plans. However, it’s important to note that remortgaging comes with the risk of increased monthly mortgage payments and the potential loss of the property if repayments are not made.
The Bank of England’s Money and Credit statistics for January 2023 provides data on interest rates for new secured loans to individuals for house purchase, broken down by LTV ratio. Here are some key points specifically related to average mortgage rates for UK households with an LTV ratio of less than 75%:
- The interest rate on new secured loans to individuals for house purchase with an LTV ratio of less than 75% was 1.66% in January 2023, which is slightly higher than the previous month (1.62%).
- This interest rate is lower than the overall interest rate for new secured loans to individuals for house purchase (which includes loans with higher LTV ratios), which was 1.81% in January 2023.
Pros: By remortgaging, you can release some of the equity in your property and use the cash as you wish. Interest rates on mortgages are generally lower than those of equity release plans, which can make this a more cost-effective option.
Cons: Remortgaging comes with the risk of increased monthly mortgage payments and the potential loss of the property if repayments are not made.
Home Improvement Loans:
If you’re looking to access cash for home renovations, you can consider taking out a home improvement loan. These loans are secured against the property, which means that interest rates may be lower than unsecured loans. Home improvement loans can also be an attractive option for homeowners who do not want to reduce their inheritance or who do not meet the eligibility criteria for equity release plans. According to Natwest the interest rate on a £10,000 home improvement loan is 5.9% APR.
Pros: Home improvement loans can be a good option if you’re looking to make home renovations or repairs. They can be secured against the property, which means that interest rates may be lower than unsecured loans.
Cons: You may have to pay fees associated with taking out the loan, and if you do not meet the eligibility criteria for equity release plans, you may not be able to access as much money as you would with equity release.
Selling a Share of the Property:
Homeowners can also consider selling a share of their property to a third party, such as a housing association or investment company. In return, homeowners receive a lump sum or regular payments and can continue to live in the property. This is known as shared ownership and can be a flexible alternative to equity release. More information about shared ownership can be found on the Government’s website.
Pros: Selling a share of your property can provide you with a lump sum of cash, while still allowing you to continue living in your home. This can be a good option if you’re looking for flexibility and don’t want to give up full ownership of your property.
Cons: You may have to share the ownership of your property with a third party, which can limit your options for selling or renting in the future. You may also have to pay fees associated with selling a share of your property.
Conclusion
When considering ways to access the equity in your property, it’s essential to weigh up all the alternatives to equity release. While equity release can be an attractive option for some, there are many other options available, such as downsizing, pension income, remortgaging, home improvement loans, and selling a share of the property. Each alternative comes with its own set of pros and cons, and it’s important to carefully consider them before making a decision.
By exploring these alternatives, you can make an informed decision that best meets your individual needs and circumstances. Whether you’re looking to fund home renovations, supplement your income in retirement, or simply want to access the equity in your property without selling it outright, there’s an option that’s right for you.
At the end of the day, alternatives to equity release can offer a more flexible and tailored approach to accessing the equity in your property. So take the time to consider your options and seek professional advice to make sure you make an informed decision that meets your unique needs and goals.