Departing from your family home can be stressful, especially for many older folk. All your memories are tied to this space and packing up can be a lengthy process.
What’s fantastic about equity release is that you can still stay in your family home while unlocking cash to help you live comfortably.
However, taking out an equity release is a big decision to make, and before you do so, you must consider the alternatives.
There are, in fact, 10 other options to consider before making this difficult decision, and here they are!
What You MUST Know
Before you continue reading, be sure to check out this video that sums up equity release:
10 Alternatives to Equity Release
Having financial freedom is something everyone wants, but in as much as equity release may look like your only way out, it’s always essential to weigh up the equity release pros and cons before you raise money that way.
Also, check out: 8 Pitfalls to Releasing Equity You Must Know
Consider these 10 alternatives to equity release before making your final decision:
Do you think you can trade your current home to purchase a smaller property or an estate in a cheaper area?
The truth is that once your children have left the nest, you will often have more space in your home than you need. This is when downsizing becomes a viable option.
Did you know?
It’s one of the more popular ways of freeing up some extra money in the UK market right now.
In fact, according to a report by a major insurance company, nearly 2 in 5 over 55’s, up to 3.5 million homeowners, plan to sell their houses and expect to raise an average of £88,000. Over 78% of the over 55’s who consider selling say that the goal of downsizing is to release equity.
So, what are the benefits of downsizing?
- Your home may now feel too big for you and your remaining family members. By downsizing, you will give yourselves a more suitable space.
- You will no longer have to worry about maintaining an older and larger property, which can be a costly challenge.
- A smaller estate means less cleaning and maintenance costs.
- You can move to a different region to fulfil a retirement dream.
It’s important to note that as much as it might be the right decision for you to make, very few homeowners can finance their retirement solely by downsizing, and there are some disadvantages such as:
- If perhaps, the property market is falling when you decide to sell your estate, you might not be able to make as much money as you anticipated.
- It can take months to find a suitable buyer or a place to relocate.
- Downsizing also forces you to leave your longstanding home, which might be stressful for you and some members of your household.
- Packing up a family home and relocating to a new space takes a lot of time and effort.
- There are also some major costs to consider when down-sizing like: estate agent fees, legal fees, moving costs, re-decorating, replacing furniture, and stamp duty.
- A smaller property means that you will less-likely benefit from property growth.
Check this out: Should You Downsize or Take Equity Release?
2. Credit Cards
Are you looking to access a relatively small amount of cash quickly? If so, perhaps consider a credit card as an alternative to equity release.
Some credit cards come with low-interest rates, and there are many options available on the market. In addition, look out for low annual fees.
You might need to make repayments on a credit card, whereas you have no obligation to do so in your lifetime with equity release.
3. Retirement Interest-Only Mortgage (RIO)
There are alternative types of mortgages to look at when investigating equity release.
One of these equity release alternatives is a Retirement Interest-Only mortgage (RIO), which is quite similar to a lifetime mortgage.
With an RIO, you can borrow a larger percentage of your property value than with equity release, this sometimes being as much as 75% of the value of your property.
However, unlike with equity release, you are obligated to make monthly interest repayments. The loan amount is then also paid back from the sale of your property when you die or move into permanent care.
Due to the required rebates, you will have to go through affordability checks.
Introduced by the Financial Conduct Authority in 2018, the benefit of RIO is that the interest rates are generally lower.
Do you still have an existing mortgage on your property? Did you know that you might be able to remortgage your home or extend your current mortgage? This arrangement can be made with your existing mortgage lender.
Remortgaging with a lower interest rate and improved terms can reduce your monthly payments, allowing you to have more spending money. It’s also a way to release some cash tied up into your estate.
Be sure to understand the difference between fixed rates, variable rates and trackers when looking to remortgage. Perhaps consult a mortgage broker to help you through this process.
5. Borrow Money
As a retiree, you still have the option of taking out a personal loan against your estate. This could be an option as it helps you avoid some of the high equity release costs.
Loans are available on a short term or long term basis, differing from the life-long commitment of equity release.
There are, however, some downsides to taking out a personal loan that you must be aware of:
- You must make monthly repayments, unlike with equity release, where you don’t have to make a single payment in your lifetime.
- Interest rates on a personal loan can be much higher.
- You can risk losing your house if you can’t make the repayments, whereas, with equity release, you will safely be able to stay in your home until you pass away or move into permanent care.
It’s always best to consult your financial adviser before taking out a personal loan.
6. Use Savings and Investments
Are you lucky enough to have investments or a positive savings account? If yes, are they sufficient to give you the lump sum or extra income you require?
If so, you might want to consider using these before taking out an equity release plan. As much as you might be desperate for some funds, always make sure you keep aside an emergency fund for life’s essentials and for you to feel secure with adequate savings in the bank.
If you have any investments, it might be a great idea to seek professional help before doing anything. Some investments might be tax-free, as the ISA2, or maybe you have some finances semi-locked up in specialised financial products.
In most cases, it would be preferable to use savings instead of other forms of income, including a private pension pot. If you don’t use this money, it will be passed on to your family when you die, inheritance tax (IHT) free.
The Lifetime ISA (LISA) is a great way to save for your retirement as everything you save gets a 25% boost from the government.
You can look at these options with your financial adviser.
7. Rent Out a Room
Are you comfortable living with strangers? If your answer is yes, then get down to registering on Air B&B to open the area of your home you want to lease out for a few months?
You can even lease one of the rooms out to a foreign exchange student over the summer, and under the government’s Rent a Room Scheme, you can easily earn up to £7,500 a year from a tenant before any tax is due on the proceeds.
There are many responsibilities involved in renting out a room, so it’s best to do your research before making this decision.
It not only brings you in the much-needed additional income, but also allows you to remain on the property. In addition, you get to meet new people and learn about their cultures, which can be an exciting adventure in your retirement.
However, this alternative’s downside is that your house may not feel like your own, and you might not be want to hassle with having a lodger on your property.
Did you know?
You can still release equity from your property and host tenants if you wish to receive income from both avenues.
8. Get Help from Your Family
While this is not ideal in some cases, it makes sense to consider whether your family and friends can lend a hand. If they can, then do not shy away from asking for their much-needed help.
Just make sure that you’re both clear about whether you’re receiving the financial aid as a gift or a loan so that you can avoid any awkwardness down the road.
Borrowing money can be great as it’s a way of taking out an interest-free loan. In addition, it will leave your estate intact and you won’t be paying the costs involved with equity release, increasing the value of your family’s inheritance.
You can also choose the option of asking some of your relatives to purchase your estate (or a part of it) and then sign a long-term lease to remain living there.
There are some cons of this to consider:
- Allowing family members to purchase your estate, or parts of it, can lead to potential complications in the future. For example, if your son or daughter were to buy the home and is then declared bankrupt, you could be evicted since you’re only a tenant.
- Perhaps, if their marriages were to break down, the house could be disputed in the divorce hearings.
- Some complex tax circumstances might also arise, primarily if you sold the property for a discounted rate. In such a situation, the taxman and the relevant local authority could assume that you have successfully given a proportion of your estate away. Thus it would be considered a portion of the taxable estate at death.
Before you consider asking your relatives to buy your property, it’s vital that you seek proper legal and tax advice from your lawyer or property manager.
9. Claim Benefits and Grants
It is always wise to check if you’re eligible for any state benefits.
You might want to consider visiting your local council to see whether you can claim pension or saving credit, disability, or council tax reduction benefits. These could increase your income or aid with home improvements.
Take Note: You might have to forfeit these benefits with equity release. Speak to your financial advisor for assistance on the matter.
Perhaps spend some time scrutinising your budget to see if you are spending more than you need to. Relooking at your expenses and eliminating unnecessary costs could help give you the cash injection you’ve been looking for.
You can additionally look at getting a job to help with your income vs. expenditure. Finally, check that you don’t have any subscriptions that have automatically renewed without your realising it.
Got Questions? Check These First
Is There a Better Alternative to Equity Release?
Yes, there are several alternatives to equity release. Some of the most common include downsizing, moving to a less costly estate, using your pension pot, or asking for help from your friends or relatives.
Apart from the popular lifetime mortgages that allow you to unlock the value of your home and repay it when you pass away or move out, there’s also the home reversion plan, retirement interest-only mortgage, and reverse mortgage.
The home reversion plan allows you to sell a part or all of your property at less than its market value. It’s all in return for a tax-free lump sum, a regular income or a combination of both. You won’t retain legal ownership of your estate, but you can remain there rent-free until you pass on or move into permanent care.
The reverse mortgage consists of taking a loan against the equity in your property. This means you’ll take out credit based on the equity. It’s a mortgage for homeowners aged 62 and older.
Can You Lose Your House with Equity Release?
The great thing about equity release is that you can’t lose your house. You will be allowed to stay in your home until you pass away, or move into permanent care.
Equity Release Calculator
Have you been through these alternatives and still think that equity release is right for you?
Use our free equity release calculator now to see how much cash you can release from your home in 2021!
Most people want the best of both worlds – to live in their current state while also having some more cash in their pocket to live an ideal life.
If there are no other options for you, this could be possible be achieved through equity release.
Be sure to make a prudent decision and learn everything about the different types of equity release. Finally, the first step is to contact an independent financial adviser to start your equity release journey. What are you waiting for?