Equity release plans can improve your finances in retirement, but should not be entered into lightly.
The plans allow you to unlock the money that's tied up in your home to provide a regular income or a lump sum payment. You can release part, or all, of the value of your home and continue to live there, usually without having to make any repayments.
"Equity" refers to the percentage of your home's value that you own. As you approach retirement it's more likely that you will have repaid your mortgage and will own your home outright.
If your retirement pot isn't very big, the money tied up in your property can be a tempting pool to tap into. There are two types of equity release plan, which work in very different ways:
You borrow a percentage of the value of your home. With most plans, you make no regular repayments during the life of the loan, and interest is charged that increases the amount you owe. However, some lifetime mortgages now require a monthly repayment to be made during the term of the loan. The mortgage is repaid when you die, or when you sell the home to move into permanent residential care.
The lifetime mortgage lender makes money by charging interest. This interest is accrued throughout your lifetime, or paid monthly in some cases.
You sell your home (or part of your home) to the home reversion company. You get a lifetime lease that allows you to stay in your home. On death or sale of the property, the reversion company gets the share you originally sold.
The reversion company buys a stake at under market value, and then benefits from increases in house prices throughout your lifetime.
An equity release plan may be available if you:
However, although most retired homeowners would be eligible for equity release, it's a massive decision – and one that needs to be considered with family and after taking financial/legal advice.
Before entering any equity release plan, make sure you take legal and financial advice.
Inheritance. An equity release plan will affect the inheritance you leave behind. Depending on how much you release, and the type of plan you hold, your children or beneficiaries may not receive any financial legacy from the value of your property. It's important to discuss with anybody who stands to benefit from your inheritance – you may want to involve them in the process, too (a reputable adviser will strongly encourage this).
Spouse or partner. If you take equity release in your sole name (either because you meet someone after taking it out, or because your partner is younger), sometimes it may mean that your spouse or partner has to move out of the home when you die. Check the situation regarding this before entering into any agreement.
Benefit entitlement. Unlocking wealth from your home can have an impact on your current and future state benefit entitlements.
Negative equity guarantee. If you are considering the lifetime mortgage option, make sure your provider offers a negative equity guarantee. This means that the amount you owe can never exceed the value of your property.
Age. The younger you are, the less you will be able to release from your home. This is because you are likely to live longer. It's not pleasant, but you need to consider what would happen if you were to die soon after taking an equity release plan. Some plans offer a capital guarantee option if you die in the early years; however, this may reduce the amount of money you can release.
Fees. Almost all equity release mortgages will require you to pay valuation, legal and arrangement fees – so you'll need to have a certain amount of money available upfront.
Property construction. The materials your home is built from can affect whether you can release equity. If your home is timber frame, or a pre-fabricated construction, you may not be eligible.
If you have to move or go into care. Most modern plans will allow you to move home and take your equity release plan with you. However, if you're moving to a smaller property, you may have to repay part of what you borrowed/released. If you have to sell to move into retirement housing or a care home, the equity release plan will normally have to be repaid.
Equity release is just one option to help boost your income in retirement. There are alternatives...
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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