Funding your retirement is not as easy as it used to be. With workplace pensions on the brink and some of the worst in years, and the increasing living costs in the UK, it can be hard for senior citizens to afford a quality lifestyle.
In comes as no surprise that many pensioners will consider using equity release as a way to extract money from their homes, something that is a £3 billion industry in the UK each year. We investigate below.
How Equity Release Works
Equity release allows homeowners over 55 to release equity and income that is tied up in their home. After paying off most of their mortgage, you can receive up to 35% of the property’s value in one lump sum and tax free. Equity release providers are able to recover their funds by having a stake in your property so that they can claim their share when you die and they gain by the increase in the property’s value over time. (Source: Access Equity Release)
To be eligible, you must have paid off a significant amount of your first mortgage, be over 55 years of age and your house is worth a certain minimum amount (usually at least £250,000).
Equity release comes in two forms: lifetime mortgage and home reversion.
A lifetime mortgage means that you continue to have equity in your property and can draw down money as and when you need it. Equally, you continue to have a stake in the property so that you benefit if the house increases in value and you can pass on this wealth to your children as inheritance.
A home reversion plan involves giving up significantly more (or all) of the equity in your property. This certainly gives you a lot more money upfront which you can use for your retirement and any lifestyle purchases. However, this means that you may not benefit by any increases in the property’s value. For more information, see MoneyAdviceService.
The main advantage of using equity release to fund your retirement is that it gives you an immediate injection of cash, in one lump sum. This can finance your retirement needs although equity release is commonly used for things like home improvements, debt consolidations, paying for children’s weddings and helping children with their first deposit.
Notably, you are able to continue living in your current property, which is a real plus for someone of old age and has settled down. There is no need to change or downsize your quality of life as a result.
Other benefits include not having any tax implications with the money you receive and it can write off your inheritance tax too.
Usually, your credit score is not a determining factor of your eligibility and this might help if you have applied for unsecured finance or been turned down by mainstream lenders.
The risks of equity release are that you are giving up equity in your home or flat – so depending on your scheme, you may lose any potential increase in value to the property that might happen during your lifetime or whether you pass it down to your children.
Similarly, you have to ask whether equity release is the most cost effective form of finance for your retirement and whether the alternatives would be more financially viable. For instance, could downsizing to a smaller property give you even more income upfront and still give you full ownership or a property?
Since most people use equity release for home improvements, could you find the income elsewhere (i.e through a second mortgage or borrowing from family) and this will increase the value of your house even more and still allow you to keep equity?
It is important to speak to an advisor and compare plans before committing to equity release.