As you reach or approach retirement age, you might find that you need more income. Perhaps you want to be able to help your children get on the property ladder, or finally go on that round the world cruise that you have always dreamed about? Whatever your reasons for wanting additional funds, equity release may be the right solution whereby you release money tied up in your home whilst you continue living there.
This is a huge decision, and anyone thinking of releasing equity should always seek professional advice from an independent source.
Nevertheless, let us take a look at the pros and cons of equity release, any pitfalls or risks, and help you to decide whether it is something you wish to pursue further.
Equity Release – What is it?
The equity in your home is the value of the property on the market minus the outstanding mortgage (if any). It is essentially the cash sum you would have if you sold it. However, releasing the equity in your home is one way of accessing the cash but without selling it or having to move. If you have paid off your mortgage and own your property outright, an equity release plan is something to consider.
Equity release in its different forms
Equity release comes in two different types, each with pros and cons. The first is a Lifetime Mortgage, which is the most popular form of equity release. The second is Home Reversion.
With this popular equity release plan, you borrow a cash lump sum as a mortgage plan for the remainder of your life or from when you need residential care, and the home is sold. The mortgage is repaid upon the resale of the home. You can usually borrow up to 50% of your home’s total market value. If you are older, you can usually release a more significant percentage.
The amount owing increases in value exponentially as you accrue interest on the amount borrowed and some schemes do not have payback options. Most lifetime mortgages come with a guarantee against negative equity, which means that if the property is sold for a lower value that the eventual mortgage is worth, the family is not responsible for paying the additional debt. However, it does mean that any value left in the property goes solely toward repaying the loan.
Home reversion plans
Home reversion schemes are another way of releasing equity in your property. With this kind of scheme, you sell part of your home but have full legal rights to living there until your death or move to a long-term care facility. The money you receive, however, is not at the same full market value in terms of the percentage of your property you sell. Generally, you will be allowed to release more money the older you are. If you have poor health, you are often allowed to release more funds too.
Equity release pros
Releasing equity has the apparent benefit of releasing some of your hard-earned funds to enjoy spending now rather than having it locked in your home’s value. The rise of house prices in the UK means that many people’s wealth remains in their home’s value and is inaccessible as a result. If the value of your home has grown over time, releasing the equity means you can supplement your income in retirement instead of it being left to cover care costs should you go into a home or being left to beneficiaries in a Will.
Some reasons why people take out equity release plans gives them significant advantages in their retirement or older age. For example, the lump sum is tax-free, and you can do what you wish with the funds. You could:
- pay off other debts
- carry out home improvements or adaptations to make staying in your home more comfortable as you age
- live more comfortably day-to-day
- help family such as children wanting to get on the property ladder
- pay for something more extravagant such as a holiday or a wedding
Additional advantages of releasing equity include being able to stay in your home as an alternative to having to downsize. You also do not have to make any payments to the loan each month unless you choose too. The interest on the amount borrowed is simply paid off from the home’s value when it is sold. This means that the tax-free cash that you get will not affect your monthly outgoings unless you choose to make payments. There are also low-interest rates at present for equity release schemes.
At present, some have rates under 4%!
Thanks to the Equity Release Council, you also will not end up owing more than the value of your home. You will not accrue debt that your family would be expected to pay upon your death.
The money tied up in your home can also be accessed as you need it if you take out a drawdown mortgage. This means you will have a regular ‘income’ from your property. With some schemes, you are not charged interest until you draw down an amount from the pot.
If your property is worth a lot or if you have other assets, releasing equity now may mean that you can avoid paying inheritance tax by giving a cash gift earlier than your death. There are other considerations here when it comes to inheritance tax, so make sure you seek professional advice too.
The Cons of Equity Release
The principle disadvantage of releasing equity is that you never get the market value of your home. You will not receive as much money as you would if you were selling it on the market. Of course, selling it is not always an option as you would still need to find a new home.
Another disadvantage is that it reduces the sum that you will leave to beneficiaries in your will. These risks vary widely depending on the equity release scheme that you choose, but they should be considered if it is essential for you to leave funds to children or others in your will. Likewise, leaving home as a part of the inheritance will not happen as the property will need to be sold to pay off the loan.
Lifetime Mortgage Risks
The main risk with this time of equity release scheme is that there is a risk that you may end up owing far more than was borrowed originally when your home is eventually sold. You could if end up owing up to the entire value of the home (but never more as schemes tend to have a guarantee against negative equity).
This is due to lifetime mortgages charge compound interest in the same way that regular mortgages do. If you do not pay off interest, then it will compound. The amount you owe would roughly double every 15 years or so if you had a mortgage with a 5% interest rate. You should be wary of this type of equity release if you are hoping to leave an inheritance when you die.
You can mitigate this risk by paying off interest regularly or by taking out smaller equity releases over some time. In this way, you only pay interest on the sum borrowed at the time and not the entire sum for the whole time. Releasing too much equity in one go can also have the negative impact of reducing any benefits that you are entitled to, such as those to help with care costs. Keeping as much money as possible invested in your home is a better option as the value will continue to grow rather than diminish. A home’s value is not included in means tests if you live there, but funds in the bank most certainly are.
Ending Lifetime Mortgages
Lifetime mortgages are meant to last precisely that – for the duration of your life until you die or move to a care home. If you choose to end a lifetime mortgage early, it will cost you. You should ensure you speak to an independent financial advisor as soon as possible, significantly if you have just changed your mind.
If you decide to move home during the lifetime mortgage, it can continue running as it would, but you will need to inform the loan company so that they can work out the value of the new home.
The Risks and Cons of Home Reversion Schemes
The main con of taking out a home reversion equity release plan is that you only ever receive lower market value for the equity released on the property, usually up to 60% but the average figure is much less than this, even as low as 30%. After death, the property will also need to be emptied quickly, often in the space of a month. For the beneficiaries and remaining family members, this is often an added stress that they do not need at this time.
You should also check whether the home reversion plan lets you move if you need to and that there will not be any unexpected expenses or problems later. You must seek advice from a conveyancing solicitor and independent financial advisor so that you can be sure that the plan will both work and be in your interests. The professionals will be able to understand and explain the contracts, the options, and any other information regarding your home’s equity.
Once you have taken out one Equity Release Plan, you will also be unable to take out any other loans with your home as the security.
Equity Release Protection
Reducing the risks to you is essential when taking out a plan. The Equity Release Council protects people who take out schemes and, as such, any company that displays the logo in their publications and materials must guarantee that you can live in your property until you move into a permanent care facility or until your death. They also offer the negative equity guarantee so you will not end up owing more than the home is worth, even in a property price slump. It would be best if you still had a solicitor check the details and documents before you sign up to an equity release plan.
Will Equity Release work for mMe?
This inevitably depends on your circumstances. What is an excellent idea for one person may be a terrible idea for another. It would help if you considered whether you have enough funds to live on in your retirement without the equity release, whether you can downsize to release equity, and whether you are for or against the idea of reducing the amount of your family’s inheritance when you die.
If you can meet your income needs in retirement another way, are open to downsizing, or want to keep the value of your estate intact for your family’s inheritance, equity release is probably not the best course of action.
Equity release can turn any equity you have tied up in your property into disposable cash perfect for any house renovation or provide an additional cash injection for holidays. As long as you have the best team to handle your case, it is relatively straightforward.
Equity release is a specialist area of conveyancing law, and as such, you need a specialist team that can handle your case promptly and efficiently. If you are approaching retirement age and want to release assets from your house, our residential conveyancing solicitors specialising in asset release can help you.
Seeking Further Guidance
As mentioned, anyone thinking of taking out an equity release plan should seek independent financial advice. There are also lots of resources online that can help you. Take a look at the following links:
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