Equity release – which allows older homeowners to cash in on the value built up in their homes is on the increase. More than 11,000 equity release plans were agreed in the first three months of this year alone, according to the Equity Release Council. This is a record number – so why is equity release becoming more popular than ever before?
What exactly is equity release?
If you bought your home 30 years ago, the average house price was around £50,000 according to land registry figures. That same house is now worth more like £231,855. This means that your house has been a very rewarding investment, providing substantial capital growth as well as a roof over your head.
You need somewhere to live. You can’t sell your home, but equity release can let you access the equity you have built up in it.
Equity release allows you to access some of the equity built up in your home as tax-free cash. How much exactly will depend on the value of your home, how old you are and where you live.
There are several different equity release schemes, but the most popular are lifetime mortgages.
These give you a lump sum as a loan and let you retain 100% ownership of your home. But unlike a conventional mortgage with most plans there are no monthly payments to make.
Instead, compound interest is added to the lifetime mortgage loan throughout your lifetime. The loan plus interest must be paid back when your home is sold, which could be when you move into long-term care, or you and your partner die.
Why use equity release?
Homeowners aged 55 or more can access the value built up in their properties to release cash, to top up their retirement income – or even to pay off conventional mortgages.
Your estate will be worth less when you die, but with some schemes you can still ensure that your dependents will receive a percentage of the value of the property, and with a high value home, equity release may even have benefits for inheritance tax.
Equity release may still have a tainted reputation from some providers in the past who had a less than ethical approach. Continuum will only recommend providers who subscribe to the Equity Release Council, whose products offer a no negative equity guarantee.
So why is it becoming so very popular?
There could be several important factors behind this growth in popularity.
The first is the fact that equity release can be safe and relatively easy to arrange.
The second reason may be the relatively poor returns currently available from savings and annuities. Many people are finding that their retirement savings now provide the prospect of a rather less lavish lifestyle than they once hoped. Equity release can provide an important extra source of income for retirement, and the sums can be released free of tax.
The third reason is the endowment mortgage shortfall. Many people who took out endowment mortgages in the past now find that they have no way to repay their home loan. Equity release may offer a solution, in effect making the house pay for itself.
But there is another, and perhaps even more important reason. New customers agreeing an equity release plan could benefit from the lowest interest rate on record. This might not seem significant as you will have no interest to pay; but it does overcome the main drawback to equity release. As the interest charged on your loan mounts, the equity remaining, which you could use to fund your long-term care or leave to your loved ones, will be whittled away.
Current low interest rates mean that charges are low – your remaining equity could last longer than ever.
How much cash you could release?
Once any outstanding mortgage has been repaid, the money is yours to spend as you see fit.
The smallest amount available for equity release is £10,000 and the most you can release is 55% of your property’s value, depending on the value of the home and the age of the youngest homeowner.
There are many providers offering equity release schemes, and their rates and terms will vary. It is essential to get the support of an independent expert to ensure you have the solution that is right for you.
If you are approaching retirement with a large mortgage still to pay or want a tax efficient way to release equity from your home to boost your retirement income, it may be worth considering equity release.
At Continuum, we not only have the expertise to help you find the solution that fits your needs, we are independent – which means that we can find the most appropriate deal for you from all the providers on the market.
Contact us today to find out more.
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.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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.
The Financial Conduct Authority does not regulate taxation advice.
Request a callback
Our services at Continuum are delivered by some of the most qualified advisers in the UK, to create the ultimate client experience.