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

They are gaining thousands of pounds on average, enough to change their final years, but this option is not for everyone. It’s only open to homeowners aged 55 and over, and has its pros and cons, depending on your personal circumstances.

The latest figures show that older homeowners are collecting typical lump sums of almost £100,000 and using the money to improve their home, pay off mortgage and credit card debt, help younger family members or enjoy themselves .

Loose equity lifetime mortgages allow homeowners age 55 and older to raise money against the value of their largest asset to spend on whatever they want, without making any interest payments in their lifetime.

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

Once the borrowed money and interest have been cleared, any remaining funds come back into their estate to be inherited in the usual way.

Equity release customers still own their home and retain the right to continue living there for life. All control plans come with a non-negative equity guarantee, which promises that even if house prices crash, customers won’t owe more than the market value of their property, and won’t put their family in debt.

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

Many have been put off by rising interest rates and falling house prices may also reduce the amount of money they can borrow.

The interest rate on an equity release plan is usually fixed for life. The higher cost of borrowing has dampened demand but now customers are starting to venture back, said David Burrowes, chairman 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 £94,806, according to ERC figures.

Many customers prefer drawdown plans, which allow customers to take an initial lump sum and withdraw more money later as needed (and only pay interest on the cash withdrawn). In this case the average initial amount drawn is £63,238.

New research from Life of the Sun which shows that the main expenditures on equity release 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 giving deposits as gifts to help children get on the property ladder.

His research shows that 73 per cent of over-50s are concerned about the rising cost of living, and 37 per cent fear running out of money later in life, said Ian Cooper , director of commercial and partnerships at SunLife. “Among those who have released equity, these concerns drop 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, offering compensation if a plan is mis-sold.

Disposing of equity will certainly reduce the amount you can leave your family as an inheritance, so you need to discuss any decision with them.

You cannot borrow the full value of the property, but a percentage of it, which increases as you age. So equity release tends to work better for people in their 70s or 80s, who can raise more money than those in their late 50s or 60s.

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

One thing is that if you smoke or have poor health, you may be able to borrow more because 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 is important to get advice from a specialist broker in every way possible.”

Other ways to raise money could include returning to work, getting financial help from family, downsizing to a smaller property or claiming any state benefits you’ve lost. Consider all options before turning to equity release, which comes with typical advice fees of around £1,500, eating into your payout.

Equity release is a complex decision, so remember that you are involved with family members, whose inheritances will be reduced as a result, and get legal advice from an attorney. This may be a last resort but it may work if the other option is to struggle for cash in your later years.

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