You’ll probably agree with me that…
If you own a house you’re one of the luckiest retirees on earth. Not only has there been a dramatic rise in property prices over recent years, but home ownership gives you some serious options.
Think about it:
With the increasing popularity of equity release, you now have the option of unlocking the cash tied up in your house, without having to sell or downsize to a smaller, low-cost property.
In fact, an increasing number of people are opting to raise money for retirement through these schemes. In fact, in the UK today, a retiree takes out an equity release product every 12 minutes.
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With unprecedented medical advancements and increasing numbers of people using fitness centres, life expectancy in the UK has risen from 74 years (in 1980) to 81 years (currently). Meaning you’re likely to live long into your retirement!
Retirement is an exciting prospect, but it’s also one of the most potentially challenging phases in human life when it comes to money. This is especially true if your pension doesn’t cover all your needs and you have no way to make up for the shortfall.
By releasing equity, you can get a tax-free lump sum1 or smaller cash injections to top up your pension. This way, you can maintain your lifestyle, and since there are no limitations to how you can spend the cash you release, you can pay for that dream holiday, start a small business and even help your family with a cash boost.
The most common form of equity release is a lifetime mortgage that isn’t paid off until you die or go into long-term care. However, in as much as it can be an excellent option, it has some limitations & pitfalls.
Thus begging the question, is equity release good or bad?
The Top 3 Equity Release Benefits
Equity release schemes are rapidly becoming the most sought after way to release the equity tied up in your property. You can enjoy the perks of having built such equity, while still maintaining ownership of your home. There two incredibly flexible ways to do this.
You can choose to either take out a life time mortgage which involves taking a secured property-based loan or a home reversion2 scheme that comprises selling a portion of your property to an equity release company.
These schemes give you the financial freedom to take money from the equity of your house and spend it as you wish.
And, it gets better!
A home reversion company may even allow you to ring-fence a portion of the value of your home so that you can ensure your beneficiaries receive a portion when you’re no longer around.
You can choose to make repayments towards the interest portion of the loan or let the monthly interest roll-up.3 The loan and any accrued interest are paid back when you die or when you move into long-term care, provided that the property remains your main residence and you abide by terms and conditions of your contract.
Interest rates can be as low as 3.4% and are usually fixed for the life of the loan. Usually, you don’t have to make any repayments while you’re alive, the interest simply “rolls up” (unpaid monthly interest is added to the loan amount). This means the debt can increase quite quickly over a period of time.
But, that’s not all.
Your state of health is also taken into account. You may qualify for an enhanced lifetime mortgage4 if you have a serious health condition or an unhealthy habit, like smoking.
The product has a “no negative equity guarantee”.5 This means when your property is sold, and agents and solicitors fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider. (Equity Release Council Standard)
Still wondering if equity release is a good idea?
There are many more benefits to taking out equity release, making it an ideal choice for you if you’re above 55+, strapped for cash, and own your own home. They include:
Benefit #1. You Get to Stay in Your Home
According to the American Psychological Association (APA), selling your home and moving to an unfamiliar place can be emotionally as well as physically draining. It’s no wonder then that getting to stay in your beloved home is one of the primary benefits of taking out an equity release plan.
You probably don’t want to be separated from your long-term friends and family members. Which is why you’d prefer to stay in your current home and be close to them.
You might even need that extra room to have cocktails and barbecue Sundays with friends. Moreover, when the grandchildren come over for the summer holidays, they’ll need that spare bedroom, so downsizing might not be the ideal solution to a cash shortage.
And that’s just one side of the story.
There are also costs involved in moving: solicitors’ fees, removal costs, stamp duty and the emotional price of uprooting from a place you’ve spent the majority of your life bringing up your children and creating memories with your friends and neighbours.
By releasing equity, you’ll be able to maintain your independence and remain in your family home until you die or need to move into long-term care.
You’ve the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan.
If you have people to pass assets to, equity release generally means there will be less for them to inherit.
Benefit #2. You Get to Live a Life of Luxury
Equity release, unlike other financial products that demand you declare how the money is to be spent, allows you to enjoy your money in any way that you wish.
Having a reverse mortgage or home reversion plan gives you the financial freedom to do all the things you’ve been dreaming about for so long. Whether you want to go on holiday to foreign and exotic locations, purchase a car, or even carry out serious home improvements, you’ll get the green light when you release home equity.
You’ll still get the right to remain in your property for life or until you move to long-term care. If you want, you may be able to move to a new property provided that it’s of equal value and meets the provider’s requirements.
But wait, there’s other ways you could spend the money.
Equity release can offer you the opportunity to gift an inheritance to your children now, rather than later. You can enjoy seeing them bringing up their children without the financial constraints that modern society is currently imposing on younger generations.
You may not want to leave an inheritance or leave your entire estate to a charity, in which case you can enjoy your money right now.
Your entitlement to state benefits might be affected by the money you receive from equity release. This is why it’s important to weigh the pros and cons and determine how it’ll affect your future choices and financial situation in later life.
Benefit #3. Protect Your Estate & Beneficiaries
Equity release allows you to put certain safeguards in place to secure your estate and family’s financial well being. This includes the no negative equity guarantee that ensures that any equity release scheme adheres to Safe Home Income Plan (SHIP) regulations.
Without this guarantee, you or your beneficiaries would have to pay the difference between the amount your property is sold at and the remainder of what you owe the provider.
The no negative equity guarantee ensures that your heirs don’t incur any debt over & above the property market value once you’ve passed on or moved into long-term care.
These are some of the benefits of taking out an equity release product that will ensure it’s one of the best decisions you’ll ever make!
If you’re still unsure, this will help.
Taking out equity from your family home can be a nerve-wracking decision to make, one that should never be taken without the advice of an independent financial adviser. However, with the stipulated rules and a heavily regulated and monitored industry, you don’t need to worry.
Equity release can be one of the smartest decisions you’ll ever make, and with all the benefits you’re bound to gain, your retirement can become the golden age of your life.
So, here’s the deal:
When considering equity release, you need to think about the effect that interest charges will have on the amount you owe. Unlike a traditional mortgage, the interest period is open-ended.
The loan amount accrues interest, which if you decide not to repay over its course “rolls up”. This type of lifetime mortgage is called an interest roll-up mortgage.
This accrued interest is referred to as compounding interest and essentially means you end up paying interest on the interest.
So, what are you waiting for?
Give your financial adviser a call today and make your retirement as comfortable and pleasant as possible! Your financial advisor should search form products from the whole of market, so they can find the right plan for you. Should they only work with a limited number of providers, they’ll need to disclose this beforehand.
How Much Can You Borrow With Equity Release?
You can normally borrow up to 60% of the value of your property, depending on the provider. The percentage typically increases along with your age. Some providers might offer larger sums to you if you have any medical conditions. Being older with a medical condition could mean a lender gives you more than if you’re 55 and in good health.
Don’t borrow the amount you need in one go, the more you borrow, the more expensive it’ll be at the end of the day. So borrow as little as you need right now. Ask both a financial adviser and a solicitor to walk you through the contract to ensure the product is the most suitable for your particular goals and needs.
Common Questions
How Much Can You Release?
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Is Equity Release Good or Bad?
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All advisers recommending equity release schemes must have a specialist qualification. You can also chat to an independent adviser for free!
More Reading:
It’s all also covered in our Equity Release Guide.
