Equity release is a way to unlock some of the money that's tied up in your home, perhaps to provide a regular income or a lump sum payment, either one of which could be a great boost to your later life finances. You can normally release up to 60% of the value of your home and continue to live there, usually without having to make any repayments. Our equity release advice service can give you a personalised overview of your options. To find out more about this form of later life lending, read on!
The 'equity' refers to the percentage of your home's value that you own outright, and as you approach retirement, hopefully that percentage will grow. You can then 'release' some of that equity through a lifetime mortgage (also known as an equity release mortgage) or home reversion scheme. This will allow you to tap into a substantial pool of money that can be put to good use in later life. With a lifetime mortgage, you are essentially taking out a loan of a percentage of the property's value. With a home reversion scheme, you can sell a percentage or all of your home to a home reversion provider.
Equity release is typically available to those aged 55+ and can be particularly suitable for those who haven't got a significant pension pot, and because the loan generally doesn't need to be repaid in your lifetime, you needn't worry about making repayments from your retirement income.
With an equity release mortgage, you borrow a percentage of the value of your home, which can be paid as a lump sum or in instalments depending on the type of plan you go for. Lump sum plans allow you to release a single amount in one go, and interest will be rolled up on the entire loan from that point onwards. These equity release schemes can be ideal for those who want a lump sum to pay off debts, make home improvements, take a holiday of a lifetime, buy a new car or as a financial gift to family. Note that the latter is often seen as a form of early inheritance.
Drawdown plans, on the other hand, allow you to release equity as and when you see fit, rather than taking a lump sum at the outset. This can be a great way to supplement retirement income. A drawdown plan can also reduce the amount of interest you owe, as interest will accrue on smaller amounts as they're released and as such will only gradually increase.
Whichever option you go for, you typically won't make any regular repayments during the life of the loan. Rather, interest is charged which increases the amount you owe, much in the same way as with a traditional mortgage but without the repayments (some lifetime mortgages now require monthly repayments to be made during the term of the loan, but these are less common).
Interest is 'rolled up' or accrued during your lifetime and is typically repaid at the end of the loan, unless you make other arrangements with your lender. The mortgage is repaid when you die, or when you sell the home to move into permanent residential care; the sale proceeds will be used to repay the lender, plus any interest due.
Another form of equity release is home reversion, whereby you sell your home (or part of your home) to the home reversion company, who typically buys it at under market value. You get a lump sum or income and a lifetime lease that allows you to stay in your home, and on death or sale of the property the reversion company gets the share you originally sold.
It is worth taking into consideration that with home reversion you will only be able to take advantage of any house price rises on the proportion of the property that you still own, so if your property increases in value you will not get the full benefit of this (but will still be able to live there). However, such schemes are now few and far between, with equity release mortgages being far more common.
An equity release plan may be available if you:
However, although most retired homeowners would be eligible for equity release products, it's a massive decision, and one that needs to be considered with family after taking financial/legal advice from specialist equity release advisers.
Equity release schemes have had a bad reputation in the past as they could often leave people owing more than the property was worth, but these days the industry is under far more scrutiny and a lot more safeguards are in place. It's now a fully FCA-regulated sector, and the industry body, The Equity Release Council, has a code of practice that members abide by. This includes a Negative Equity Guarantee, which means the amount you (or your estate) owe can never exceed the value of the property.
Knowing how much equity release costs will be a key consideration for anyone thinking about taking out this kind of mortgage, and the core part of that will be the interest rate you're charged. This will vary according to your own individual circumstances – including your age and how much you're looking at releasing from your home – which is why you'll want to use an equity release calculator when discussing things with your provider.
You'll be required to pay fees for arranging the mortgage, too, much like with a residential mortgage, which can vary according to provider. You'll also have to pay valuation and legal fees, and advice fees are another cost.
However, it's only when you sell the home that the full costs will be realised, as it's only then that interest will have to be repaid. This is why getting the best possible interest rate is essential, and why you'll want to work with advisers and brokers to get the best deal.
Taking out a lifetime mortgage can be a lifeline for those who may not have a decent pension pot, or who aren't willing or able to downsize into a smaller property. As long as you fully understand the process – including the type of lifetime mortgage you're getting, how interest is charged and how it can impact everything from inheritance tax to state benefits – it could prove to be a viable way to boost your bank balance in retirement.
That said, releasing equity from your home isn't a decision to enter into lightly, which is why you'll need plenty of support to determine if it's the right course of action for your particular needs. Not only will you need to thoroughly discuss it with your children as it'll affect the amount of inheritance you leave behind, but you'll need to seek suitable equity release advice, with this being a vital part of the process.
Before entering into any equity release plan, make sure you take legal and financial advice, the importance of which can never be underestimated. You'll need to be totally confident that you're making the right decision, and speaking to qualified, independent equity release advisers can help ensure that.
They'll go through the whole process with you, from explaining the nitty gritty of how equity release works to giving you a personalised illustration, and many will offer an equity release calculator so you'll see exactly how much you could borrow, and what the eventual repayment could look like. Our preferred equity release advisers, MCB Financial Services, are equity release specialists, and can help ensure that releasing equity from your home is the right decision.
Equity release is just one option to help boost your income in retirement. There are plenty of 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.