The property wealth of retired homeowners has grown by a whopping £12.5 billion in the last 3 months – gaining on average £2,690 each from their houses.
House prices in the UK continue to rise, and drastically in the case of London and South East properties, with over-65s now owning over £873.8 billion of property wealth outright – and new record high.
But what is equity release, and how can it be beneficial to UK retirees?
Equity release is a way of unlocking the cash value of your home, while still remaining in it. You can get a cash lump sum, draw a regular income or a combination of the two.
Equity release as a concept works because your home holds an equity value: this is the open market value of your home, less any mortgage or other debts held against it. Equity release allows you to get hold of this value, and can provide a great alternative to an income drawdown pension plan.
There are two main types of equity release scheme:
- Lifetime mortgages
- Home reversions
Equity release works best for those with little or no mortgage. There are also certain rules:
- Must be over a certain age (usually 55)
- Must own your home
- Must be able to afford any repayments
A lifetime mortgage is a loan secured on your home.
You continue to own your home but will have to pay back the mortgage + interest to the lender. The mortgage is repaid from the proceeds of the sale of your home when you die or move out (possibly to a care home).
There are 3 types of Lifetime Mortgage:
- Roll-up Mortgage – The loan is paid in a cash lump sum or in smaller lump sums over time (sometimes known as a drawdown mortgage). Fixed or variable interest is added to the loan but there is no interest for you to pay until the house is sold (usually when you die or move out).
- Interest-only mortgage – The loan is provided as a cash lump sum. Fixed or variable interest is paid each month. The amount borrowed is repaid when your home is sold.
- Fixed-repayment mortgage – The loan is provided as a cash lump sum. No interest is charged on the loan. The lender agrees to a higher sum than the original loan once the house is sold. This is agreed at the start of the process and is based on your age and life expectancy.
The home reversion method of equity release is where a reversion company buys, or arranges for someone to buy, part or all of your home. You will receive a single cash lump sum or regular payments from the sale proceeds.
It is an alternative to the Lifetime Mortgage process.
Home reversions often mean you’ll get less than the full market value of your home (usually 20%-60%). This is because the buyer can’t re-sell the property until you die or move out.
The older you are (and therefore the lower your life expectancy) when you start the scheme, the more you can expect from the value of your home.
Releasing your equity
- Get Advice – Before you go ahead with any financial decisions, we recommend professional advice from an independent advisor. They’ll explain your options and whether equity release is right for you, while explaining both the benefits and the risks.
- Shop around – An IFA will search the whole market to find you the best provider available. If there is ever anything you do not understand, don’t be afraid to ask your advisor; they are there to support you and provide unbiased advice.
- Processing your Application – The provider that you choose will value the property and run a credit check. If entering a home reversion scheme, any valuations must be carried out independently.
- Unlocking your equity – You’ll receive an offer document before anything is finalised. If you are completely happy with all the terms and conditions you are free to go ahead. You usually receive the funds within 8-12 weeks confirmation.
There are risks to be aware of before starting equity release proceedings.
- Income Tax – Your income tax position could be affected and you could be left worse off.
- State Benefits – Likewise, an increase in income may reduce your entitlement to state benefits
- Downsizing – an equity release could leave you short of capital if you decide you want to downsize your home later in life
- Care – You may not have the option to pay for a private care home in later life if desired. You may also restrict any access to a deferred payment scheme that the government may offer toward the cost of care.
- Beneficiaries – Equity Release may reduce the amount you can pass on to any beneficiaries at the end of your life.
- Inflation – Inflation can have a negative effect on a fixed income you may arrange. £100 will be worth less in 10 years than it is today.
- Losing your home – If you cannot meet repayments, or you do not maintain the home well enough this could result in the loss of your home. The lender would usually allow you ample notice and time to put right any issues before the situation came to this.
If equity release sounds right for you in retirement, you could be sitting on – or in, more precisely – a goldmine of wealth.
This article was produced with the help of Ryan Smith, part of the content development team at My Retirement Options, helping retirees to choose the best pension income route in retirement.