Matt O’Hara, Chief Investment Officer, Unison.
For many Americans, the traditional pillars of retirement—Social Security and 401(k) plans—no longer feel sufficient. Rising costs and longer lifespans mean that the nest egg once expected to cover a comfortable retirement may come up short. In this landscape, home equity has emerged as a critical resource.
A recent Unison Mortgage Corporation survey of more than 1,000 U.S. property owners highlights just how pivotal this equity can be. Of those surveyed, 94% regard their home as their most significant asset, with 47% stating that their property comprises more than half of their total wealth. More than half (59%) fear potential homelessness in retirement if they cannot tap their home equity.
A Flexible Option
One emerging option is equity sharing home loans, which offer property owners—particularly retirees—the opportunity to access a portion of their property’s value without relinquishing ownership. Retirees who rely on Social Security or have watched their 401(k) plans diminish can reduce their monthly costs by converting high-interest debt into a more manageable arrangement.
By design, many equity sharing home loans allow the borrower to defer a portion of repayment—typically tied to the shared appreciation amount—until the end of the term, while upfront costs, such as origination fees, are settled at closing. This structure helps borrowers lower their monthly obligations, providing immediate relief for those balancing limited retirement income against rising living expenses.
For instance, consider a property owner who uses a shared equity loan to pay off a second mortgage or a home equity line of credit with a substantially higher interest rate. By consolidating multiple debts into a single monthly payment—and potentially gaining extra cash in the process—this homeowner significantly improves monthly cash flow. Such flexibility can be especially important for retirees who want to stay in their homes while meeting everyday expenses or making necessary improvements.
While reverse mortgages have traditionally served a similar purpose—providing cash by drawing against home equity—they often come with high fees and strict qualification criteria.
Reverse mortgages tend to have very high interest rates, which compound principal quickly over time. This can lead to the principal balance being higher than the value of the home, being so-called “upside down” in the house. Providers avoid that by setting very low loan-to-value levels. So, the amount borrowed is limited. By using equity sharing, the amount owed moves up and down with the value of the house. We refer to this as asset-liability matching in the investment management space. So, a mortgage that uses equity sharing to reduce interest rates gives you a much closer match between the value of your home and what you would owe at some point in the future.
Investors, for their part, also find these loans appealing. Though the primary goal is to help property owners, the structure of a shared equity product can generate returns aligned with the long-term rise in real estate values. When property owners do well—through appreciating real estate prices—investors share in that appreciation. This built-in alignment can foster more favorable outcomes: Property owners access funds for retirement, while investors have the potential to see predictable, steady returns tied to a real estate market that has surged to an estimated $35 trillion in total home equity.
While these loans offer lower monthly payments, property owners will give up a portion of future equity gains. Additionally, they potentially pay a balloon payment at the end of the loan.
Also, like all financial products, equity sharing arrangements come with contractual obligations and conditions that may vary by provider. Retirees should review terms carefully and consider consulting with a financial advisor or housing counselor to ensure the loan fits their individual retirement strategy.
Leveraging What You Already Have
In a climate where 85% of our company’s survey respondents have reportedly tapped into their 401(k) savings unexpectedly, long-term stability becomes paramount. Home equity sharing loans offer a way to lessen the financial strain of retirement, bridging the gap between fixed incomes and rising costs. For those rethinking retirement, the question is no longer just how to save but how best to leverage what they already own.
By enabling retirees to remain in their properties and maintain financial freedom, home equity sharing stands out as a useful option. With both consumer and investor interests aligned, these innovative loans are helping to reshape retirement planning for a new era.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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