Equity release is a term that comes up very often when talking about property ownership and retirement. Equity release describes a type of financial product that’s available to people over the age of 55. The aim behind it is to use a property to provide people with a lump sum or income – often to boost their retirement funds – while allowing them to remain in their own home. For many people, this is more appealing than downsizing to a smaller home.
WHAT ARE THE EQUITY RELEASE OPTIONS?
There are a few ways that equity release can work, but the most common products are lifetime mortgages and home reversion . In both these cases, you don’t necessarily need to have fully paid off your mortgage, and some products can be used for a purchase. These products use the value of the house as the basis to secure a loan. The debt becomes repayable when the homeowner dies or moves into long-term care.
With a lifetime mortgage, you borrow an amount against your home, usually with a fixed or capped interest rate. It works a little like a mortgage in reverse – you receive a lump sum and the interest increases every month, making the debt bigger all the time. If you don’t want the debt to increase with interest, if you can afford to, then some lifetime mortgages allow you to pay off some or all of this interest, on a monthly basis, if you choose to. The debt, including any interest that has been added to the loan, is repaid when you die or move into long-term care – either from your estate or from the sale of your home.
A home reversion plan is another financial solution to provide older homeowners with tax-free cash. Here, you actually sell your home – or a portion of it – to a home reversion provider. In return, they either pay you a lump sum or regular payments and you can live in the home rent-free until the end of your life.
You can often protect an amount of the value to leave to your children or dependents. When you die, the plan provider arranges to sell the home and shares the proceeds in line with the agreement.
THINGS YOU NEED TO KNOW ABOUT EQUITY RELEASE
Equity release schemes can seem very persuasive – but as with any financial product you should research all the details and the alternatives before making a decision. An Adviser is key to ensure you have the right equity release advice, but also a view of other options that may make more sense to you. As while these products can be a good source of income, there are sometimes other solutions available that are potentially less risky.
The key thing to remember is that the longer you live, the greater your debt becomes, if you are adding the interest on to the mortgage. Interest rates are typically higher than with other mortgage products, so the amount owed grows relatively quickly.
This is, of course, how the lenders make their profits. They might give you a £25,000 lump sum, but after a decade or two that debt could reach as much as £100,000. This can affect the size of the estate you leave to your dependents. Reputable providers offer a no negative equity guarantee. This means that you will never owe more than the market value of your home. If you do decide this is the right choice for you, find a lender that’s a member of the Equity Release Council. This trade body requires the providers to abide by a number of important rules.
IS RELEASING EQUITY THE RIGHT OPTION FOR YOU?
It is worth exploring the types of equity release, but there are other ways to access the money tied up in your property, so we will discuss all options through, as you might find that the best way to release equity from your home is to sell it and downsize. This way you’re not exposed to property market fluctuations and you have complete control of your money.
Everyone’s situation is different and unique, so the best way to plan for your retirement is to talk to a financial expert. We will explore your unique financial situation, your property options, and the risks and benefits of each approach. It is important to explore everything in detail so that you can make an informed decision.
An equity release product will reduce the value of your estate, will not be suitable for everyone and may affect your entitlement to state benefits. To understand the features and risks please ask for a meeting to discuss your circumstances.