Equity release may be growing in popularity, especially in the financial turbulence following Covid 19. But how does it work, and can it really be a retirement funding solution for you?
If you have owned your home for several years, you probably have enjoyed some very exciting capital growth. There have been ups and downs in the market of course, but a home bought 30 years ago could be worth five times what you paid for it.
Being able to tap into that wealth could be a valuable source of funds, especially if retirement is coming, or already here, and funds are a little shorter than you might wish.
But of course, you cannot simply sell up and cash in your home. You still need somewhere to live.
What exactly is equity release?
Equity release comes in two forms, lifetime mortgages and home reversion plans. Both provide a way of accessing the wealth your home has made for you with a cash lump sum, but it is important to understand the differences between them.
Home reversion plans allow you to sell your property to the scheme provider in return for a tax-free lump sum or regular payments. A lifetime tenancy is then created, protecting your residency and freedom to live in your home rent-free for the rest of your life. There is no interest charged and the percentage sold remains fixed until the last homeowner has died or gone into permanent care. The house will be sold with proceeds being split in accordance with the percentages originally agreed, and any money left over will then be shared amongst your beneficiaries as an inheritance.
It has some important benefits, but it does mean that you will no longer own your home. Many people considering equity release may therefore prefer a lifetime mortgage.
A lifetime mortgage is in theory a mortgage like any other, but it provides the option of having that mortgage with no monthly repayments.
This means that the interest is ‘rolled up’ and added to the final repayment when the plan ends. The longer the term of the plan, the greater the amount of interest that will have to be repaid.
Your lifetime mortgage is only repaid through the sale of your property when you die or move into long-term care.
The amount of interest to be repaid can be kept to a minimum by either withdrawing equity in smaller chunks over time with a drawdown of funds as you need them.
There is a variation on this. Retirement interest-only mortgages are primarily aimed at homeowners who have failed to clear their mortgage debt before retirement time. They can also provide funding for those who want to cash in on their home’s value to help fund their pension years. They mean regular interest payments each month, but they do have the advantage that the debt will not increase, and the interest payments can be fixed, making it easy to plan ahead,
The advantages and disadvantages
Equity release has some big advantages, allowing you to access the wealth you need in retirement, even if your pension has been less rewarding than you had hoped.
Equity release means you don’t have to experience the stress, inconvenience, and cost of moving out of a family home you love to a smaller property.
It can also come with some important safeguards, in the form of negative equity guarantees. These mean that if when your plan is repaid, your house is worth less than the amount you owe, your loved ones won’t be expected to repay the difference to the lender – and so they will never be out of pocket.
There are downsides too. If the interest is ‘rolled up’ and added to the final repayment when the plan ends, the longer you live, the more interest will have to be repaid.
There can also be early repayments charges, which make a plan a very costly option if you change your plans – for example decide to downsize to a house in the country after all.
Of course, for many people the biggest downside of all is the reduced inheritance. Because equity release reduces the value of your estate, it will mean a reduced inheritance for loved ones – although it may be possible to ringfence a proportion of your wealth when you set up the plan.
To understand the advantages and disadvantages of equity release, and see if it could be a solution that might work for you, you will need professional advice, and a look not just at your mortgage, but at all your financial arrangements.
At Continuum, we not only have the expertise to help you find the solution that fits your needs, we have access to all the deals on the market, including many very attractive deals that are only available through mortgage advisors.
If current low annuity and interest rates are tarnishing the prospects for your golden years, it could mean that you can afford to enjoy your retirement after all.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable Equity Release product, you should seek independent financial advice before embarking on any course of action.
Equity release will reduce the value of your estate and may affect your entitlement to means tested state benefits.
A lifetime mortgage is a loan secured on your property.
Home reversion plans and lifetime mortgages are complex products. To understand the features and risks, ask for a personalised illustration.
If you pass away soon after taking out the plan, you have effectively sold your property cheaply. However some plans have provisions in place so that you are protected.
It can be difficult to reverse the deal once it has been made, as you are selling part of your home.
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