What Are The Best Equity Release Alternatives in 2024?

alternatives to equity release

Equity release is a regulated financial product accessible through financial advisors and specialist mortgage products. It’s only suitable for those aged 55 and over.

There are two types to choose from. A home reversion plan and a lifetime mortgage. Most equity release providers offer lifetime mortgages, with a few finance houses focusing on home reversion plans.

With a home reversion plan, you sell some or all of your home equity to a finance company while retaining the right to live in your home for the rest of your days rent-free.

With a lifetime mortgage, you don’t sell the equity but instead borrow against it.

In both cases, taking out an equity release product will reduce the value of your estate. All lenders providing equity release products are members of the Equity Release Council.

This is the watchdog for the equity release sector, and there’s further protection with FCA (Financial Conduct Authority) regulations requiring lenders to ensure customers are fully informed of potential pain points and that financial advisors explore alternatives to equity release schemes ensuring the product is the best match for your particular circumstances.

Possible Alternatives to Equity Release Schemes

The list below outlines the main avenues to raise capital in later life. Some you may already be familiar with; others are lesser-known ways to borrow or release equity from your home without using an equity release plan.

Alternatives include:

  • Downsizing your property
  • Taking out a remortgage
  • Renting a spare room (or two)
  • Taking out a refinance product on a second home
  • Various types of secured loans
  • Personal loans
  • Credit cards

Many options will be subject to an affordability assessment, so you’d need to have sufficient retirement income guaranteed to be accepted for certain types of finance for longer-term borrowing of large amounts.

All secured products will have different lending conditions specified by the lender, and they will provide different loan-to-values (LTVs) based on your property value and consider your age and current health at the time of your application.

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Explore Equity Release Alternatives In More Detail

Downsizing Vs. Equity Release

Downsizing means selling your home to buy another cheaper property, then paying for your new home (likely smaller in size with fewer bedrooms) in full using the proceeds from the sale of your current home and pocketing the difference.

If you aren’t sentimentally attached to your property, this could be an option, but it’s not without expenses. The UK Property Price Index for 2019 estimates the price of moving home is £3317, consisting of a mortgage valuation fee, property surveyors, stamp duty, conveyancing fees, estate agent fees and home removals.

Then there’s the hassle of sorting through items to keep and things you may not be able to take with you due to having perhaps no more spare bedrooms or a guest room, which can force you into altering your lifestyle.

Apart from the costs involved in moving to a smaller-sized property, there’s still the question of whether it is a good choice for your circumstances. Other factors could influence cost, including the ability to take out a new mortgage on your new home if you need to raise finances before your old property sells.

The upside is that if you have already paid your mortgage and have a buyer lined up, it’s possible to be in an advantageous position as a cash buyer is more attractive to sellers as it means you’re a chain-free buyer so there’s less risk of the sale falling through at the last minute.

If you need to take a new mortgage for your new property, upper age limits may be an issue.

Transferring Equity Release

If you’ve already entered into an equity release plan using your current home as security, it’s still possible to downsize as a requirement of the Equity Release Council is for lenders to make their products portable so you can downsize, take your current plan with you without having to pay an early repayment fee. However, this is usually subject to the plan being in place for five years.

If you do have an existing plan, transferring your equity release is a similar process to transferring your mortgage.

Straightforward, but it’s also an opportunity to re-assess your financial situation and the rate of interest you’re accruing, as the interest rates today are more favourable than they were a few years back.

You could save on compounded interest charges by transferring an existing equity release plan by downsizing to a smaller property and moving your plan to a better alternative.

Equity Release Vs a Standard Remortgage

It’s possible to use a remortgage product to release some of the equity tied up in your home by taking out a new mortgage higher than your existing one. However, a standard remortgage requires you to meet the affordability criteria, which can be a problem for those without a fixed income in retirement.

Most lenders providing remortgages also have upper age limits, some of which are 70 years of age. This would mean that if remortgaging at 60, you’d only be suitable for a 10-year mortgage rather than 20 or 25-year terms.

The upper age limit can reduce the term the loan needs to be repaid in, which will increase the monthly repayments, sometimes beyond your means, in which case, the lender will need to reject your application.

Where remortgages are of most value is when your property value has risen. If, for example, you bought your home for £120,000 and it’s now worth £170,000, you’d have £50,000 positive equity, plus the capital you’ve already repaid. Therefore a remortgage could be an option to let you take out a new mortgage to release some of the equity.

It should be noted that there are sometimes restrictions on what you can do with the money raised from a remortgage, as the lender will have a financial interest in your home and may stipulate that the funds released can’t be used for business purposes. With equity release plans, the funds you receive can be spent any way you choose.

Retirement Interest Only (RIO) Mortgages

A retirement interest-only mortgage is an alternative to equity release, and more lenders are starting to offer these products.

They work similarly to equity release in that the loan lasts for life with the balance paid when you die, but the key difference is that you will be making monthly repayments on the interest, preventing interest from compounding and reducing the value of your estate.

Most lenders have minimum age requirements of either 55 or 60 for retirement interest-only products. This may be an option worth exploring for those concerned about estate protection.

Some equity release providers let you pay some or all of the interest; however, the repayments of interest are voluntary. On a retirement interest-only product, the interest repayments must be made monthly and will be subject to affordability requirements.

For those with a lower fixed income in retirement that fails to meet the threshold for a remortgage or other type of finance, the lower monthly repayments with interest only could mean you’d be able to afford the loan. However, the longer you live, the more interest you’ll pay.

Renting out a spare room

If you have the space, you could raise finance by renting out a room letting you earn up to £7,500 tax-free through the Rent a Room scheme. Two options you have here is to advertise a room to rent on platforms such as Airbnb and other sites catering to room rentals booked by the night.

Some guests may be in town for a meeting, others a concert, some a week to two weeks to explore the area, benefiting from home comforts for less than the price of a hotel room.

The second option is to become a lodger landlord, renting the room to a short or long-term tenant rather than pricing by the night.

If you are considering renting a room out and still have a mortgage, it’s best to check with your existing mortgage lender, as technically, it is using your home for business purposes. You’d also need to notify your home insurance provider as you may need to switch to a commercial policy.

Secured Loans and Second Charge Mortgages

Secured loans only require some type of asset to be used as security. This is usually the case with vehicle finance. When you buy a new car on finance, the security is the car.

If you fail to make repayments, the loan provider has the right to repossess the vehicle. It is possible to take out a secured loan using the equity you own in your home as the security asset. As an example, if your home is valued at £200,000 and your existing mortgage has £50,000 remaining to be paid, the equity you own would be £150,000.

That would be the maximum you could borrow, subject to lending criteria. The original mortgage would stay the same, and you’d need to make repayments each month on the second mortgage too.

This can be beneficial if you need to remortgage to a lower interest rate but find your credit rating is pushing you into a higher risk bracket pushing interest rates higher.

Instead of remortgaging at a higher interest rate on your whole mortgage, you could take out a second-charge loan against some of the equity you own in your home, paying the higher interest only on the extra capital you release.

Second mortgages are also a way for self-employed homeowners to raise capital, as some lenders won’t lend to self-employed people or those with a limited trading history.

Unsecured Loans / Personal Loans

Personal loans don’t require any security and let you borrow up to a maximum of £25,000 in most cases, although some lenders, such as First Direct, are willing to go up to £30,000 without any security.

The maximum repayment term for personal loans is ten years. As no security is required, you must have a good credit rating and meet the lender’s criteria to secure a decent interest rate.

Interest rates are higher on unsecured loans due to the increased risk. The advantage of using this type of loan is you don’t put your home up as collateral against the loan, but that’s reflected in the interest rate you pay.

Credit Card Finance

Credit cards are convenient but can quickly get out of control due to high-interest fees. Managed properly, though and with careful planning, you could use balance transfers at lower introductory fees – often interest-free for the first six or nine months – letting you spread the finance cost out for longer.

If you find yourself facing a large unexpected expense that’s led you to look for ways to release equity from your home, it may be worth considering using a credit card for paying a deposit or a lump sum towards work you need to have done, essentially buying yourself time to explore alternative finance options. In that respect, you could think of the credit card as bridge finance for homeowners.

A bridging loan is used by businesses when they run into cash flow problems. These are usually high interest and very short term, ranging from weeks to months, but rarely years.

With any finance, it will take a few weeks to a few months from your application date before funds are released. A credit card could give you a line of credit until funds are released.

As you can see from above, there are various alternatives to equity release plans, and the best way to find out which option would suit your particular circumstances is to speak to a financial advisor knowledgeable on equity release. This is because they also need to know every other alternative available to be able to advise on appropriate products tailored to your needs.

In all cases, when you’re applying for finance, a credit check will be completed by the lender you apply with. If, at first, you don’t succeed, do not try again. Credit checks leave a footprint when you apply for a loan of any type. They don’t when you enquire, though. Once a credit check fails, the next lender to search your credit file will be able to see another lender has recently turned you down.

Seeing someone else decline raises the question of why they rejected your application. It’s easier just to say no. That’s usually the case with larger lenders. If your credit files are sub-par, a specialist lender may be required.

It’s important to channel your application towards a lender most likely to approve for your circumstances as best practice after having a loan rejected is to wait at least three months before re-applying with another lender.

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Our broker service can compare the whole of the market and put you in touch with a qualified advisor with expert knowledge on equity release and alternative means of borrowing, who can advise you on the most cost-effective method suited to your needs.

In all cases, the terms attached to any offers are explained jargon-free, ensuring you know everything involved and understand the nature of the agreement you’re entering into.

Equity release is not suitable for everyone, but that’s the case with every type of finance product, as they’re based on your personal circumstances at the time of application.

What’s a good fit for you now may not be the same five years down the road, so it’s important to consider all the alternatives to equity release before deciding to take out a Santander lifetime mortgage or a home reversion plan.

When it comes to exploring alternatives to equity release, there are several resources you can utilize to gather information and make informed decisions.

Here are some key resources you can consider:

  1. Financial Websites: Visit reputable financial websites such as Investopedia, The Balance, and MoneySavingExpert. These platforms often provide comprehensive articles, guides, and comparison tools to help you understand various alternatives to equity release.
  2. Government Websites: Check official government websites related to finance and retirement planning. In many countries, government websites offer resources, tools, and guidance on retirement options, including alternatives to equity release.
  3. Financial Advisors: Consult with a qualified financial advisor specialising in retirement planning. They can provide personalized guidance based on your specific financial situation and help you explore alternative options.
  4. Books and Publications: Look for books and publications written by financial experts that cover retirement planning and alternatives to equity release. These resources often offer in-depth insights and strategies to consider.
  5. Online Forums and Communities: Engage in online forums and communities dedicated to finance and retirement planning. Platforms like Reddit and Quora have active communities where you can ask questions, seek advice, and learn from others’ experiences.
  6. Seminars and Webinars: Keep an eye out for seminars and webinars focused on retirement planning and financial alternatives. These events provide an opportunity to learn from industry professionals and ask questions directly.

To utilize these resources effectively, consider the following tips:

  • Take notes while researching to help you compare and evaluate different alternatives.
  • Seek multiple perspectives and cross-reference information from different sources.
  • Be mindful of the credibility and reputation of the sources you rely on.
  • Consult with a financial professional to obtain personalized advice tailored to your situation if necessary.

Remember, understanding your financial goals and consulting with professionals will help you make well-informed decisions regarding alternatives to equity release.