When you are over the age of 55, you should be looking forward to a long and happy retirement. Perhaps you are already enjoying it! If you have planned for it and invested in a good pension and saved well, all will be well, but for many this is not the case. Getting the most out of retirement requires cash and if your investments haven’t turned out well, or you have not been in the position to put enough aside, then that is one commodity you are going to be short of.
Perhaps equity release is the answer. According to the Equity Release Council £1.06bn of property wealth was accessed in this way in the first quarter of 2020. That was up 14% on the same period in 2019. Of course, lockdown dented Q2’s figures, but those numbers show that equity release is becoming a popular option. The same report suggests that people are not just using the money to help fund their retirement but also for one-off expenses. A report in The Telegraph agrees, citing home improvements, inheritance gifts and holidays as some of the reasons foe equity release.
So, could equity release be the answer to your problems or is it something to stay clear of?
What is equity release?
Equity is the difference in value between the market price of your home and any debts you may have against it – your mortgage, for instance. Equity release is a way to turn that equity into money in your bank account without having to sell up and move out.
The traditional way to do that is downsizing. Moving to a smaller, less expensive property allows you to bank the difference and use it as you like. But downsizing is not an option for all. It is a difficult decision to leave your family home and perhaps move to a different area, a decision that only becomes more difficult as you age.
Equity release is a mechanism that lets you get hold of that cash while still living in your home, thus avoiding the stress and upset of relocating.
How does equity release work?
Broadly, equity release involves mortgaging your property but not having to pay it off until you die or move into long-term care. There are two main ways to achieve this:
This is by far the most popular form of equity release. If you are 55 or more, you simply borrow the sum you need, and when the house is sold after you die or go into care, the money is paid back. Typically, you can borrow between 18% and 60% of the value of your home, though the older you are, the higher the percentage.
Interest is charged, so the amount you owe rises over time unless you make an arrangement to repay the interest as you go. If, instead, you opt for an ‘interest roll-up mortgage’ you will end up owing much more as the interest compounds.
Almost always there is a ‘no-negative-equity guarantee’. This means that if your house price, for whatever reason, was suddenly to fall, the debt would never be more than the sale price. However, that doesn’t mean that all the money for the sale wouldn’t go to the mortgage company.
Interestingly, if you are in bad health or have an unhealthy lifestyle, you are likely to be able to either borrow more or borrow at a lower rate of interest (morbidly, this is because they expect your time on Earth to be less than a healthy persons).
If you do decide to take out a lifetime mortgage it is useful to know that this doesn’t tie you to your current property. It is possible to move as long as your new house is acceptable security for the loan. Also, it is usually a good idea to borrow amounts as and when you need it rather than taking out the whole lump sum. This avoids unnecessary interest charges.
To qualify for home reversion you normally need to be 65+. The idea is straightforward. Effectively, you sell part of your house to the lender. In return, it gives you a tax-free lump sum, based on a below market price valuation. When the house is finally sold, they get whatever percentage of the price you agreed. So if, as one might expect, your home rises in value, the provider makes more profit.
Why the below market price valuation? The lender needs to build in a profit, as it may (hopefully!) have to wait many years to collect. For example, if your house is worth £320,000 and you sell a 25% share you might expect a lump sum of around £40,000 – much less than the actual market value. It may even be less. Some providers will only give you 20% of the market value. If you die years later and your house sells for £440,000 the lender will receive 25% of that, some £110,000. You might argue that not knowing the final cost is immaterial as you won’t be around, but your family may not feel the same way.
Once again, you do have the right to move as long as the new property is acceptable, and sometimes you can have the money in several instalments and not just a lump sum.
Returning to the Equity Release Council’s report, it states that less than 1% of plans taken out in Q1 of 2020 involved home reversion so it appears that the vast majority of people seeking equity release prefer the certainties of the lifetime mortgage.
Is equity release expensive?
With current interest rates so low, you might regard the 3-5% interest rates currently being offered as not bad, but remember that is much higher than a standard mortgage. If you do opt for a plan where you don’t pay back the interest, the figures can be grow fast, often doubling every 15 years or so.
There are also the costs involved in setting the plan up in the first place. Most authorities suggest that you need to budget £3,000 for these.
Is equity release right for me?
There are many variables that have to be considered before you make a decision about equity release. Your age, pension(s), how you want your retirement to be and your health are just some of the factors involved. It is likely that once in a plan it will be difficult and costly to get out of the arrangement should your circumstances alter or you change your mind.
Above all, be careful, do your research, and seek advice from experts. Don’t blindfold yourself and rush in just to get the money as soon as possible. You need knowledge to understand all the ramifications of equity release. It is a great tool, so make sure you do it in a way you will be 100% happy with.
Make sure that any financial advisor you choose has access to the whole of the market and ask exactly what fees will be charged. Ensure they are on the Equity Release Council member directory.
For more information, the Money Advice Service can tell you more, and MoneySavingExpert is another great impartial source of knowledge. If you’re looking for one-on-one help and advice, we’re here to help guide you to the right financial products for you. When entered correctly, Equity Release can give you the retirement you always dreamed of, so if you’re thinking about it and want to find out if it’s right for you and your circumstances, don’t hesitate to reach out to us. One of our team members will be more than happy to answer all your questions and talk you through your options. To arrange a call back, simply click here and we’ll get back to you as soon as possible. Alternatively, call us on 0161 823 1733, or email us directly at firstname.lastname@example.org.