Is equity release right for me?
Is equity release right for me? A recent report by OneFamily found that the over 65’s have nearly 5 times more wealth in their home than in their pension. With the shortfall in pension savings, some homeowners are looking at equity release to fund their retirement.
Equity release had some bad press a few years ago because it was not regulated and the terms were often unfair. Fortunately, there is now much more stringent regulation and a wider range of more flexible products. Equity release is not the right option for everybody but if used in the right way it can be a helpful solution.
What is Equity Release?
Equity release is where you unlock some of the equity within your property and convert it into cash. There are two different methods of equity release:
- A lifetime mortgage whereby you still maintain ownership of your property.
- The second and much less common is a Home Reversion Plan whereby you sell some or all of your property in exchange for a cash lump sum.
In both cases, you can live in your home until you die or go into permanent long term care. If there are joint borrowers then this would be until the second borrower died or went into a nursing home. At this point, the house is sold and the loan repaid.
For lifetime mortgages, the interest is ‘rolled up’ so that you do not pay any monthly payments. Interest is added to the loan instead and the final debt is due on death. There are, however, products which offer the option to make monthly or annual interest payments in order for the original loan amount to stay the same.
Who is it for?
Equity release is for homeowners and the minimum age is usually 55 years old for the youngest borrower and some providers have a minimum age of 60 years. It would typically be older for Home Reversion at 65 years. The older you are the higher proportion of your property value you can borrow.
Why might it be used?
Equity release is designed to free up some of the capital in your home. Often retired people have more money in their home than in their pension and a third are reliant upon state pension to provide income.
Many older people are servicing interest-only mortgages or are under pressure from debt that they owe. Equity release can help to ease the burden of this and be viewed as a way of accessing savings that have built up through property value.
Here are some of the reasons why some people may want to release equity from their home are as follows:
- Debt repayment
- Low income – need help with daily living
- Newly retired and want to maintain the current lifestyle
- No dependents
- Home improvements
- Long term care – not entitled to state help
- Holiday
- A gift to the family – e.g. house deposit
- Estate Planning – reduce the potential for an Inheritance Tax Bill
Example 1: Financial Security
Alan and Mary aged 71 and 70 own their own home with a repayment mortgage. They had previously been on an interest-only mortgage and are now trying to repay £100,000 over a 10 year period so that they can stay in their home. Now they are struggling to meet the repayments and have increased their borrowing on credit cards.
They have looked into getting a traditional mortgage with a lender that lends up to a later age but their income is not sufficient. This is causing them a lot of stress and they are concerned that they may lose their house.
They have taken out an equity release mortgage and have raised enough to pay off their current mortgage and some of their credit cards. They are planning on making monthly interest payments so that the interest doesn’t roll up and there is still equity in the home.
Their monthly interest payments are voluntary and they are affordable to them. They now have the security of knowing that they can remain in their home.
Example 2: Enjoying Retirement
Joyce is 83 years old and lives in a large house with no intention of moving. It is worth approximately £300,000. She has no savings and has a credit card with a balance of £15,000. Joyce receives a widow’s pension as well as state pension and enjoys a comfortable level of income. She would like to go on a round-the-world cruise, repay her credit card and do some home improvements. Equity release is a good option for Joyce as she will get to maintain her lifestyle and has the option of paying the interest if she wishes.
Example 3: Helping Family
Carol and Michael own their own property. It has grown substantially in value over the years and is now worth over £1,000,000. They have a good pension income and are comfortable with this but would like to help their son get onto the property ladder. They have no savings and the only assets they have are within their home. As they do not want to move house, equity release is a good option for them. They want to release £100,000. They do not want the interest to roll up as they want to preserve as much of their estate as possible so they are choosing to pay the monthly payments.
Alternatives to Equity Release
Before selecting equity release as an option an adviser will typically speak to you about other alternatives to generate the income or capital you require. Alternative options may include:
- Moving to a smaller / less expensive property
- Selling your property and renting somewhere
- Taking in a lodger
- Do you have any other assets that you could use?
- Could you look at re-budgeting?
- Are there any state benefits that you might be entitled to?
- Could your family help to support you?
Other Considerations
State benefits – your entitlement to some state benefits (not the state pension) may stop if you release equity from your home
Interest roll up – if you do not pay the interest then it will roll up and typically the amount you owe will double over a 10 year period.
Home Reversion / Lifetime Mortgage – Ensure you choose the right option for you
Early Repayment Penalties – Some products have fixed early repayment penalties and others are linked to Gilt rates which can potentially be very high. You should ensure you understand these before going ahead.
Equity release is a specialist area of advice. You should seek advice from an independent financial adviser before progressing. At Veracity Financial Planning, we advise on Equity Release and can see you at home or in our offices in Nottingham.
Book a free consultation about your equity release options with Sally Jackson, Independent Financial Adviser, www.trentwillsestates.co.uk/independent-financial-advice or call 07921196730.
