Equity Release for Home Improvements: Is it a Good Idea?

For many people our home is more than bricks and mortar it is a sentimental space where we have built up memories over decades.

Undoubtedly, if you’re a homeowner who has cleared their mortgage or has very little left to pay you will have also spent those decades building up equity.

Equity is the amount of value you have tied up in your property, which is great in theory, but in practice when we reach our later years, we often need that money for other things.

One such thing you might need money for is to improve the home you’re living in, but is releasing equity for home improvements a good idea?

This guide looks at equity release products, the types of home improvements that can be funded with equity release and ultimately whether it is a good idea or not. Let’s explore this further.

What is Equity Release?

Equity release is a financial product that allows you to release the money tied up in your property.

In most cases, this is by way of a secured loan called a lifetime mortgage (see below).

The loan doesn’t have traditional repayments and is instead paid for when you pass away or go into long-term care.

The lifetime mortgage is typically paid back by either your beneficiaries refinancing the property when you pass away or, if they are unable to refinance, the lender can sell. 

In order to release equity in the UK you need:

• To be 55 years old or older
• Have a property valued over £70,000.
• Have a property of suitable construction for the lender.

You will also need to seek advice about equity release and how it works in your personal situation. Because the equity release could disinherit your next of kin it is a highly regulated product, and you will need to obtain advice from someone qualified in equity release.

When you release equity from your property you can spend the money on whatever you want to (as long as it is legal).

There are no limitations on how you use the money and unlike traditional loans or mortgages you don’t need to earmark the money for something specific.

You can also choose how you receive the money; you might want it paid in regular payments to subsidise retirement income or you might wish to drawdown the money all at once in a lumpsum.

You can even opt to have the lender pay the money as both a lumpsum and regular payments thereafter this is especially useful if you need a chunk of money initially but don’t want to spend it all at once.

Can You Release Equity for Home Improvements?

Yes, as mentioned, there are no restrictions on how you spend the money as long as it is for legal means.

When it comes to home improvements there are a few additional areas to consider:

• Are you improving the home to increase the value of your property?
• Are you looking to make your property mobility friendly?
• Are you looking to fix up the property in general to prevent it from falling into disrepair?

Which category you fall into will help you decide whether equity release is right for you, this is because equity release is more suitable for certain home improvement situations than others.

Increasing the Value of Your Property

It is extremely common for people to build extensions, conservatories and renovate the property to increase its overall value.

It might be tempting to release equity to do so but there are a couple of areas to consider.

1. The property will be sold by the lender when you die or require long-term care if your beneficiaries are unable to refinance or sell themselves
2. The interest on the equity release can build up with most providers putting a limit on the property value (some charge more see the section about Equity Release Council).

This means that you could be improving the property and its value and therefore increasing the amount the equity release company can recoup on the loan.

However, if you are happy with those considerations, equity release could be an excellent option for you to raise funds for home improvement work. 

Home Improvements for Mobility

At the beginning of the article, we mentioned the sentimental value of your home and the memories you and your family have built up over the years.

Because we cherish our homes so much it can sometimes be unthinkable to move out later in life, even if the property isn’t well suited to growing old.

This is very common, and many people decide to downsize with a heavy heart to a smaller property or a bungalow.

But if you can’t bring yourself to give up the home you have built your life in, you can improve your property with your mobility and ongoing comfort in mind.

One of the most common reasons people release equity is to make some form of adjustment to their existing property to help in later years. Adaptions like: 

• Converting bathrooms to wet rooms.
• Setting up panic alarm systems or installing additional security.
• Installing stairlifts or converting downstairs living space into a bedroom.
• Railings and handles to get around easier.
• Wheelchair access if needed.

Whatever you need to do to improve the mobility around your property, equity release can be a good idea in these circumstances.

Prevent the Property from Falling into Disrepair

Decades of usage add up to decades of accumulated wear.

It is common for homes to become energy inefficient or need a complete makeover to make them comfortable and sustainable places to live in later life.

With energy costs rising so rapidly, improvements like solar panel installation, insulation and triple glazing are becoming more important to mitigate the spiralling prices.

Your property may need a general makeover, such as modernising décor or making your garden more manageable going forward.

An important point to mention here is that if your property is in dire need of repair, you might not be able to release the equity in it this is because lenders have a minimum standard of condition for properties, they will release equity on.

If your property does meet the minimum standard, then equity release can once again be a good option to improve your living space and quality of life in your retirement years.

Methods for Releasing Equity

There are two types of equity release product in the UK – a lifetime mortgage and a home reversion plan.

Both function in different ways below we outline the differences.

Lifetime Mortgages

A lifetime mortgage is a loan or mortgage that is provided by a lender.

The loan accrues interest over time which can either be paid by the borrower or allowed to compound.

When you pass away or need long-term care the lifetime mortgage will need to be redeemed either by your beneficiaries or the lender. 

The minimum age for a lifetime mortgage is 55, and they are the most common form of equity release in the UK (accounting for around 90% of all equity releases).

Home Reversion Plans

A home reversion plan isn’t a loan or mortgage.

Instead, a home reversion company will buy a percentage of your property from you at a discounted rate and then sell the property when you pass away or need long-term care.

With this product, you may decide to sell 50% of your property to a home reversion plan provider.

They won’t offer you 50% of the value though and in many cases will offer much less than the percentage they’re buying.

For example, 50% of your property may be worth £200,000, but a home reversion company may offer you £100,000 for that share.

Because home reversion plans can be so uncompetitive, many opt to take a lifetime mortgage but with no interest payments and the ability to protect a percentage of your property for your next of kin, there are undoubtedly some advantages of home reversion plans over lifetime mortgages.

Your adviser will be able to thoroughly explain both products and then advise which is best for your situation there isn’t a one size fits all solution with equity release and for some, a home reversion plan is the best option.

Building Home Equity

With property prices rising, the equity we have in our homes is typically increasing over time. 

But there are other things you can do to build home equity, the most common way to do this is to clear any outstanding mortgages you have on the property.

This includes any second charges you may have against the property.

Home improvements can also be used to improve the overall value of a property, but you should seek advice before undertaking any work. This is because:

• Some home improvements will devalue a property (mobility rails etc.)
• Some home improvements cost more than the return you will see from any equity increase.
• Some home improvements make it harder to sell a property for example, solar panel installation can be problematic when selling a property.

Are There Drawbacks to Releasing Equity for Home Improvements?

There are a few drawbacks to releasing equity to fund home improvements.

The biggest drawback is that you will be leaving less to your next of kin by way of an inheritance.

This is because whichever equity release product you choose will diminish the overall inheritance to some extent.

In rare cases with poor equity release products, you could also end up owing more than the property value.

This is why it is vital that you seek out a lender and broker that are members of the Equity Release Council to ensure that a No Negative Equity Guarantee applies to your product. 

The Equity Release Council

Currently, the equity release market is regulated by the Financial Conduct Authority (FCA) and although the rules and guidance put in place by the FCA are advanced, it still has a few gaps that predatory lenders can exploit.

This resulted in the formation of the Equity Release Council (ERC), a group of members that uphold strict standards in order to promote a safer and more reputable industry.

Currently, 90% of all lenders and brokers providing equity release are members of the ERC and they’re committed to meeting the rules set out by the council.

Unfortunately, this means that there is still 10% of the market that is unaccounted for when it comes to meeting the ERC’s high standards.

Among other things, an ERC standard provider will commit to not charging you more than the property is valued at.

For example, even if the debt owed is more than the property value, the provider will write off the amount above the property value as a loss and not pass on that cost to your next of kin.

Providers in the aforementioned 10% of non-members may still saddle the burden of any additional debt to your next of kin.

Should You Release Equity?

Releasing equity is a significant financial commitment and is as serious (if not more so) than obtaining a standard mortgage.

If you’re thinking about releasing equity you should contact Boon Brokers, a whole of market mortgage, insurance and equity release broker.

Boon Brokers is also a member of the Equity Release Council and is committed to meeting their standards of excellence.

Boon Brokers offers fee FREE advice, and we can help you understand the equity release market fully and whether releasing equity is the right option for you.

Contact Boon Brokers today for your initial consultation.