Could mortgage equity withdrawal help fund your retirement?

Retired homeowners who may have worked all their lives but have not built up a satisfactory retirement fund might be considering equity withdrawal. This is when you use equity release to access some of the value of your home without having to sell it.

The main advantage is that you release money for your living needs while you may benefit from any rise in value of the property. The main disadvantage is that it reduces the value of the estate you can leave your heirs. There are a couple of other downsides to think about too:

• Getting a lump sum or taking extra cash to supplement your income may reduce your entitlement to means-tested benefits, now or in the future
• If you get care at home and it's funded by the local council, either fully or partially, the local council may start charging you or asking you to pay more

Two types of equity withdrawal

There are two types of equity withdrawal. The most common is a lifetime mortgage. Like a regular mortgage, it's secured against the value of your home, but the money doesn't need to be repaid until you die or move into permanent residential care. If you're married or joint borrowers, this will happen when the last person in the couple dies or moves into permanent residential care. However, unless you pay the interest, the amount will compound over the years, and this will reduce the value of your estate.

The other type of equity withdrawal is a home reversion plan, where you sell part or all of your home to a reversion company. This company gets some or all of the proceeds when your home is sold, normally after your death or when you move into permanent residential care. Because they don’t pay the market rate, your estate might be significantly reduced if you die shortly after taking out the plan.

It's important to get independent financial advice on the pros and cons to ensure you find a good deal, have enough to live on and have enough to leave your heirs if you'd like to leave them a legacy. You should get advice on whether another product or service may be more suitable for you, for example people should generally consider downsizing first.

Also bear in mind that there are minimum age limits and other conditions for purchasing these products.

How to mitigate risk with industry standards

Equity release in general did not have a good reputation for many years. 'The sector has been criticised for encouraging people to take on debt, particularly later on in life,' says the Daily Mail. 'There have also been other concerns about equity release, such as customers falling into negative equity where the value of a property is less than the loan taken out against it when house prices fall.'

But it is possible to mitigate risk by making sure that the product you use is from a company that's a member of the Equity Release Council (Opens in new window) the representative trade body whose members follow a voluntary code of conduct and meet certain product standards. In February, it announced some changes to its product standards and a wider review of consumer safeguards, including the fact that now you'll never owe more than the value of your home when it's sold after you die or move into permanent residential care. The other safeguards are:

• you can live in your property for life, or until you move into permanent residential care
• you can move your plan to an alternative property (providing it's acceptable to the equity release product provider)
• for lifetime mortgages, the rate of interest you pay has to be fixed for each release of funds or, if you have a variable interest rate, the rate has to be capped for the life of the loan
• for lifetime mortgages, you can choose to make penalty-free repayments on your loan (providing it meets the criteria of your equity release provider)

In addition, all firms advising on or selling equity release must be regulated by the Financial Conduct Authority (FCA). Customers may also have protection and security via access to the Financial Services Compensation Scheme (Opens in new window) The FCA can provide information on the risks and on how to compare products, but you still need to keep an eye out for scams around equity release.

High cost of living has made retirement more difficult

Consumer organisation Which? (Opens in new window) offers detailed information on equity release. It reports that according to new research from the Equity Release Council, funding retirement has become more difficult with the steep rise in living costs. Almost half (46%) of people don’t feel confident about their future finances, a big increase from 35% in 2021. 57% of UK adults say their financial situation has gotten worse over the past year.

Retirees aged 65–74 have shown the largest dip in confidence – 18% lacked confidence about their future finances in 2021, but that has now jumped to 39%.

Government organisation Moneyhelper (Opens in new window) advises: 'If you’re thinking of taking out an equity release product, you should take financial advice from an independent financial adviser. They'll be able to suggest a plan suitable for your needs by researching all the products on the market. All advisers recommending equity release schemes must have a specialist qualification.'

Consider how much you need to live on

The most important problems to consider before making the decision to take out an equity release product are how much money you need to live on in the future, whether you would like to help your adult children buy a home now (rather than waiting to inherit) and, given the effect of compound interest, an accurate forecast of what value (if any) will be left in your home by the time you die or sell the property in order to go into permanent care.

With the current high cost of living, and the fact that some people may have not been able to save enough for a comfortable retirement, equity release could be a boon for those who need financial help, but it should be handled with care. Fees will be payable for getting equity release – for example, an application fee, survey fee and legal fees.

On the flip side, standards have generally improved in recent years, and there are more protections for consumers.

Looking for somewhere to keep your savings? Bank with Chase and you can open a saver account. Start saving with as little as you like, and we’ll calculate your interest daily and pay it monthly.

18+, UK residents. A Chase current account is required to open a saver account.

Recommended reading

• Could you retire with friends?
• Could you retire to a cruise ship or a hotel?
• Working beyond retirement doesn't have to feel like work

Disclaimer: The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products. Articles may reference products and services that Chase UK does not currently offer. This article is for information only and does not constitute financial advice. We do not provide advice on equity release schemes, including whether they may be suitable for your needs.