Homeowners can get £95,000 lump sum – but is it right option for you? | Personal Finance | Finance

They’re raising tens of thousands of pounds on average, enough to transform their final years, but this option isn’t for everyone. It’s only open to homeowners aged 55 and over, and has both pros and cons, depending on your personal circumstances.

Latest figures show older homeowners are raising typical lump sums of almost £100,000 and spending the money doing up their home, paying off mortgage and credit card debt, helping younger family members or simply enjoying themselves.

Equity release lifetime mortgages allow homeowners aged 55 and over to raise cash against the value of their biggest asset to spend on whatever they like, without having to make any interest payments in their lifetime.

Typically, the interest rolls up over the years and is cleared from the proceeds of the property sale when the owners either die or go into long-term care.

Once the money borrowed and interest are cleared, any remaining funds fall back into their estate to be passed on as an inheritance in the usual way.

Equity release customers still own their home and retain the right to continue living there for life. All regulated plans come with a no-negative equity guarantee, which pledges customers can never owe more than the market value of their property, even if house prices crash, and will not pass on debt to loved ones.

Almost nine out of 10 over-50s are now aware of equity release, new research from equity release provider SunLife shows, although so far only four percent have taken out a plan.

Many were deterred by rising interest rates while falling house prices may also reduce the amount of money they are able to borrow.

The interest rate on an equity release plan is typically fixed for life. The higher cost of borrowing knocked demand but now customers are starting to venture back, said David Burrowes, chair of industry trade body the Equity Release Council (ERC). “Pent-up demand is likely to emerge as the interest rate cycle begins to turn again.”

The average equity release customer who takes out a lump sum borrows a pretty hefty £94,806, according to ERC figures.

Many customers prefer drawdown plans, which allow customers to take an initial lump sum then draw more money later as required (while only paying interest on the cash they have actually withdrawn). In this case the average initial sum drawn is £63,238.

New research from SunLife reveals top equity release spends are for home improvements, debt repayment and travel.

Others spent the money on early retirement or supporting family members, for example, by making early inheritances or gifting deposits to help children get onto the property ladder.

Its research shows that 73 percent of over 50s are concerned about the rising cost of living, and 37 percent fear they will run out of money in later life, said Ian Cooper, director of commercial and partnerships at SunLife. “Among those who have released equity, these concerns fall to 63 percent and 28 percent respectively, and most say they feel happier in their lives as a result.”

But is equity release right for you?

READ MORE: Retirement – Over 55s could be sitting on £106,000 on average

Insurers Aviva, Canada Life, Legal & General and LV= also offer equity release plans and the sector is regulated by the Financial Conduct Authority, giving redress if mis-sold a plan.

Equity release will inevitably reduce the amount you can leave your loved ones as an inheritance, so you must discuss any decision with them.

You cannot borrow the full value of the property, but a percentage of it, which rises as you get older. Equity release therefore typically works better for people in their 70s or 80s, who can raise more cash than those in their late 50s early 60s.

The equity release payout is tax free but could reduce your eligibility for any means-tested state benefits you currently claim, so always check first.

One quirk is that if you smoke or are in poor health, you may be able to borrow more as your life expectancy is shorter.

Thomas Brett, head of mortgage and lending at Contact State and a member of the ERC’s standards committee, said lenders are offering more innovative products including the option to make payments to reduce the interest bill. “As always, it’s important to get advice from a specialist broker into all possible avenues.”

Alternative ways of raising cash could include returning to work, getting financial help from family, downsizing to a smaller property or claiming any state benefits you have missed. Consider every option before you turn to equity release, which comes with typical advice charges of around £1,500, eating into your payout.

Equity release is a complex decision so remember to involve family members, whose inheritances will be reduced as a result, and take legal advice from a solicitor. This may be a last resort option but may work if the alternative is to struggle for cash throughout your final years.