An active and fulfilling quality of life is what every retiree desires and making the best financial choices can help them achieve that. One of those choices potentially being equity release - a lucrative market that has enabled older homeowners to gain more financial flexibility, by loaning £3.92 billion to consumers in 2019.
However, choosing the right products can be complicated. Therefore, we’ve supplied some useful information to give you an understanding of what equity release is, as well as handy resources to get you started on your journey.
What Is Equity Release?
Equity release is a way to turn the value of your property into a sum of cash that you can access upfront. It allows you the freedom to access your money in one lump-sum, in instalments, or a combination of both - all repayable with interest.
There are a variety of equity release products you can choose from, allowing you the flexibility to opt for a package based on your needs. It’s a common assumption that this is a quick and straightforward way to receive money in retirement, particularly during challenging times where you may need more disposable cash. In these situations, being free to use wealth from your property without having to move can seem an attractive choice.
However, you must understand equity release can be a lifetime commitment, and a potentially expensive one at that, because of its high interest rates.
How Does Equity Release Work on Property?
The two main types of equity release are Lifetime Mortgages and Home Reversion Plans.
Under both plans, you would release some of the wealth tied up in your property.
The key difference being that a Lifetime Mortgage enables you to continue to own your property while taking out a loan against it.
While Home Reversion means you would effectively share a percentage of your home and get cash in return. For example, you may sell 50% of it and receive money from that share in one lump sum. Alternatively, you may receive instalments for as long as you wish - whether that be for a few months or a lifetime.
With a Lifetime Mortgage, you have several ways to access your cash.
As with Home Reversions, a lifetime mortgage can give you cash in one lump sum, or payments can be broken down so that you receive it in small, regular amounts. You receive an income based on what you’ve borrowed, and the agreed maximum limit that the plan provider has put in place.
You have three options with a Lifetime Mortgage:
- Lump-sum lifetime mortgage: Access the total value of your property in one lump-sum.
- Drawdown lifetime mortgage: Access an initial advance and get more cash whenever you wish.
- Interest-serviced lifetime mortgage: Like the Drawdown lifetime mortgage, but allows you to pay the interest back early, therefore reducing the total amount you owe.
All products that fall under Lifetime Mortgage plans allow you to continue to own your home. The loan secured against your house is repaid if you move into long term care, or when you die. The loan is repaid in addition to the accumulated, rolled-up interest.
Rather than paying off the interest monthly, it would be taken care of upon repayment of the loan by your estate. The exception to this would be if you opted for the Interest-Serviced mortgage and paid off the interest early.
No repayments would take place until both you and your partner no longer occupy the property. If you want to leave money from the property to your family as inheritance, you have the power to ring-fence some of its value. That way, you can release part of the equity while keeping the other part for your family after you die.
Home Reversion Plan
With a Home Reversion Plan, you can sell all or a percentage of your property, while still living in your home. Regardless of how much of your property you choose to relinquish for cash, you’ll have access to a lifetime lease. This means you’ll still have your right to remain in your property and won’t have to pay any form of rent.
Again, you’ll have the flexibility to receive your cash either as a lump-sum or in small, regular instalments.
Even if there are fluctuations in property values, this won’t affect the value of the proportion of the property you continue to own.
Once your plan ends, the property is sold. The money made from the sale is shared between any parties who own a percentage of the property.
What Are the Potential Pitfalls Of Equity Release?
Both forms of equity release are a way for older homeowners to access more cash upfront, providing a greater sense of security in their finances beyond retirement.
With Lifetime Mortgages, you’re able to achieve this while protecting some of it to leave in a will. All while maintaining the right to continue living freely in your home.
However, it’s crucial to be aware of the potential implications involved. Here are a few of them:
Higher Interest Rates
Lifetime loans can be more expensive than standard mortgages, as repayments may be higher due to the increased interest rate.
Lower Value for Your Property
Home reversion plans will typically offer you a sum of money much lower than the actual value of your home.
Less Protection for Rainy Days
Choosing to release some of your equity now may make it difficult to access cash for an emergency or important event, later down the line.
Interference with State Benefits
If you’re currently receiving the state pension, receiving equity may affect your pension claim.
If you’re trying to decide if equity release is the best route for you, you should speak to a financial advisor about your options.
Also, you can use an equity release calculator and start comparing quotes from different plan providers.