We all look forward to the day when we can sit back and relax, knowing the alarm that sounds for another day of work won’t be going off. Retirement is meant to be a time of enjoyment. A time when we can enjoy the fruits of our labour. All those years of work have now amounted to relaxation with friends and loved ones. The chances to go on those holidays, upgrade the house, help the children financially and put many life stresses behind us have arrived. However, with the cost of living in the UK causing people to make every pound go a little further, retirement pots aren’t quite doing what was initially hoped.
To help assist with this, many approaching or already in retirement are opting for equity release. A form of finance that helps give you a little more cash to enable those life goals and more to be achieved during the twilight years.
Is it worth it though? We took a look at equity release and what it could mean for you and what it could mean for the beneficiaries of your estate.
What is equity release?
Equity release is a form of loan that comes from releasing the money tied up in your home. Only available to those aged 55 or over, it is often seen as a great way to access funds to help make retirement a bit easier. And perhaps one of its most alluring features is that it is tax-free.
In some cases, where pension plans are more than enough to live off, people opt for equity release as a way to help support other family members, perhaps helping them get on the property ladder for example.
Equity release can be paid in one lump sum, or should it be preferable, it can be paid in monthly instalments or accessed as and when you need it, known as drawdowns. As with any loan though, the money must be paid back at some stage, and this can sometimes deter people from wanting to take out a plan.
There are commonly two forms of equity release, both offering homeowners the chance to boost their retirement funds and remain living in the property.
Lifetime mortgage
Lifetime mortgage equity release is the most popular option. Aimed at those aged 55 and above, it offers homeowners a cash sum that can be paid in one lump sum, in monthly instalments or accessed as and when needed. With it being a loan, interest accrues, however, should equity release be taken via a drawdown, rather than in a lump sum, interest is only accruing on the actual amount withdrawn and not the amount available to withdraw.
You don’t have to make monthly payments on a lifetime mortgage, although it is advised you do, as the interest can rise quickly. If you leave the entire loan to be paid back upon your death, there can be a large bill for your estate to settle. However, if you manage the equity loan correctly and have taken advice from a company like Mortgage Saving Experts, you can affordably pay back up to 10% of the loan value each year and still enjoy the benefits of a fresh cash injection.
Any outstanding balance, whether you have been making monthly payments or not, is settled either upon death or when you are moved into care through the sale of the home. If anything happens to be left over, it will be distributed as per the will.
Home reversion plans
A home reversion plan is the other form of home equity release likely to be chosen. In this instance, a tax-free lump sum is given to you for a share of your home. In effect, you sell a portion of your home to the home reversion company. This means when it is sold, the proceeds from the sale are split based on the percentages of ownership.
You get to remain living at the property, rent-free, until you die. Unfortunately, the offers made by the home reversion provider are often below the market value but with a roof over your head guaranteed, and a lump sum to be enjoyed for these later years, it can be an attractive option.
What can equity release be used for?
You can use the money you receive from equity release for anything you like, and this is why it can be so popular among retirees or those approaching retirement. Where the chances to upgrade the home, and therefore increase its value may have been too prohibitive before, the opportunity now presents itself much easier.
Likewise, if that dream cruise has always eluded you, the cash in your account can make those fantasies become reality, allowing you to create memories with loved ones that may have otherwise not been possible.
Perhaps one of the most common reasons people choose equity release is to try and help their family. We all know affordable housing is tough to find, and rising bills alongside stagnant wages make it harder than ever for families to get on the property ladder. Having the funds available to support your family in something that could benefit them in multiple ways is one of the most rewarding ways to use equity release. It doesn’t end there though, university fees, first cars, and more can all be gifted to a family member through the equity you have released.
What will equity release cost?
Interest rates for a lifetime mortgage can vary quite significantly, so it is always advised you speak to a company like Mortgage Saving Experts to get a full assessment of affordability. Typically, interest rates can range from 5 or 6% but can be as high as 8 or 9%, perhaps even more in some cases. It should also be remembered that the interest compounds if you aren’t making monthly payments. This can leave your estate with a large repayment to make after you have passed. Whilst the sale of the home should help to cover most, if not all of it, you can sometimes find yourself in negative equity. This is where you owe more than the home is worth. Luckily, Mortgage Saving Experts ensure a no negative equity guarantee is present, meaning that no debt can be accrued by the beneficiaries of the estate. In addition to the costs brought on by the interest, there are fees associated with the setting up of equity release too, and these can range from £1,000 to £3,000 or more.
How much equity can I release?
If you have grand plans for how to enjoy your retirement, you might need to have an idea of how much cash could be available to you. Lenders offering equity release will always look at the value of your property, your age, and your general health before deciding. In most cases, the older you are, the more you will be able to access. That being said, if your home is in poor condition or is classed as a non-standardised construction, a lender may refuse to offer you the chance to release equity at all.
Should you be eligible to release the equity in your home, you may be able to release up to 50% of the value, depending on whether you meet the criteria of the lender.
Should I take equity release to help me through retirement?
This can be a tricky question to answer! It certainly gives you some financial freedom that you may have otherwise never had. This can open doors to home improvements, new adventures or assisting family members. These reasons alone are often enough to inspire people to take it. However, with the costs involved, such as the interest and the fees, it can become expensive and leave your loved ones with a much-reduced inheritance.
It won’t only have an impact further down the line, there can be an immediate one too. If you happen to receive benefits, you could see them cut or removed entirely once you have received funds from equity release.
That being said, the aim of retirement is to live life a little more stress-free, and equity release can help make this happen. When it is properly managed, you can still benefit from the loan, and have your family benefit in the future too. Speak to an expert before committing to any form of equity release, then you can make a decision that stands to benefit you all.