If you’re facing a pension shortfall, need funds for long-term care or just want to enjoy your retirement fully, then equity release might seem like an attractive option. After all, it allows you to tap into the wealth you’ve accumulated in your property over the years, but without having to sell your home or move to do it. But there are a lot of people out there who still aren’t sure what equity release is, or how it could work for them. So today we wanted to shed some light on what it is, how it works and how it can benefit you.
What Does Equity Release Mean?
Equity release is the broad term for a family of financial products, all of which allow you to release the equity tied up in a property. In other words, if you own a house, you could use an equity release plan to get a lump sum of money, using the value of your house without having to pay back monthly repayments. There are some caveats though – like the fact you can only do this if you are over the age of 55. However, that has made it a more popular option for the elderly, who need cash to pay for care, or those on the younger end of the ‘over 55’s’ spectrum who want to buy that dream car, caravan or other luxuries to enjoy during their early retirement. The equity release provider must be repaid at some stage though – usually from your estate when you pass away. This is one of the main reasons that any equity release provider you use should be a member of the Equity Release Council, who provide a guarantee that they will never claim back more than the sale price of your house from your estate. So make sure you check this before you commit to any provider.
What Are My Equity Release Options?
When you’ve decided that equity release is the right option for you, there are a couple of options open to you. Firstly, you will need to speak to a specialist equity release adviser, who can help you understand how much you can take out of your home, and even arrange it for you. There are a few factors that affect how much you can release, and what your options are. This includes the age of the youngest homeowner (if they are under 55 then you will be ineligible), the valuation of the property (which needs to be over £60,000), any outstanding mortgages or secured loans on the property. On the other hand, if you are considered to have ‘impaired life’, you could be allowed to borrow more against your property, which is a great way to ease financial stress at difficult times, or help you achieve those ‘bucket list’ items. All of these things can affect the maximum lump sum some lenders will give, but an advisor will be able to guide you through the options that are right for you.
Lifetime Mortgage: A lifetime mortgage involves you taking out a mortgage secured against your property, while still retaining ownership. It needs to be your primary residence for you to qualify for this form of equity release. With this option, you can segment some of the value of your property and put it aside as inheritance if you want to, or you can just take out a chunk of the value, or even the whole sum. You can then choose how you want to make the repayments: month by month, yearly, or just let the interest add up and pay it in one lump sum. The loan amount, plus any interest that’s accrued on it, is paid back to the lender on your death, or when you move into long-term care.
Home Reversion: This is a different model, and in layman’s terms it means that you sell part or all of your home to the lender, in exchange for the value in either a lump sum or in monthly payments. But don’t worry – if you choose to do this then you are still able to live in the property, rent free (though you do still have to insure and maintain it while you live there) until you pass away. As with the lifetime mortgage option, you can choose to segment a portion of the value for later use, but that value will stay the same, and not be affected by the value of your property going up or down. At the end of your plan, your property is sold, and the sale proceeds are shared according to the diversions set out by ownership.
Equity release is a fantastic way of releasing money from your home to spend in your retirement or semi-retirement years, in any way you choose. Whether you need the money for care and sustenance, or you want to live life to the full, equity release gives you the power to do it. But it isn’t something that should be done lightly, as there are some risks involved as well, such as eating into your equity, leaving less for your loved ones to inherit. To find out if equity release is the right option for you, we recommend talking to an impartial advisor, who can walk you through all of the options, positives and negatives, and help you make that decision. At The Money Guardian, we provide exactly this service, along with arranging your equity release should you decide to go for it. If you’d like to know more, just get in touch with us to book your free consultation.