Equity Release: How to make your biggest asset work for you in retirement
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
Equity release is a way to release wealth tied up in your property, without selling it and moving to another home. It is specifically aimed at over 55’s
who own their property outright, or have small mortgages left to pay, but do not have sufficient funds available to meet their lifestyle needs. This article will look at the various options available to customers who could potentially find themselves in one of the following scenarios:
- Asset rich and cash poor
- Interest-only mortgage coming to an end with no credible repayment strategy
- Funds required towards lifestyle in retirement eg. holidays, second home
- Funds required towards a one-off capital outlay, e.g. purchasing a car, home improvements
- Gifting of monies to children now (as opposed to after death) e.g. towards a house deposit
- Funding ill health or care, but intend to stay in your home for as long as possible
- No financial dependants or next of kin and no plans to leave a financial legacy, i.e. hoping to spend it all in life but remain in your home until death or sale of the property
What are the options?
A lifetime mortgage is a type of mortgage where you choose to extract your fund through a single lump sum or smaller amounts over time, to a limit agreed with the provider.
You can elect to retain some of the value of the property as an inheritance for family members, and you retain full ownership of your home.
The interest can be paid monthly (keeping debt to a minimum) but is usually rolled up and repaid by your estate. This happens when the last person living in the property dies or moves into long-term care on a permanent basis. The amount released depends on your age and the value of the property, some providers are able to offer larger sums to those with certain past or present medical conditions, or lifestyle factors such as smoking.
Home Reversion Plans
A home reversion plan allows you to access all, or part, of the value of your property while retaining the right to remain in it, rent-free. The provider will purchase all, or a percentage, of your house. Ringfencing of your proportion means it remains the same, regardless of changes in property value. The provider sells your property when the plan ends and split the sale proceeds according to proportions of ownership. Like lifetime mortgages, you may be able to access more funds, depending on your age and medical conditions. You are provided with a tax-free cash lump sum or regular payments, and a lifetime lease guaranteeing you the right to stay in your property rent-free for the rest of your life. There would be no day-to-day interference and no restrictions in treating the house exactly as before.
Retirement Interest Only Mortgages
Another option for older borrowers who want to free up equity from their home are Retirement Interest Only (RIO) mortgages. RIO mortgages are similar to normal interest-only mortgages with interest paid every month. However, rather than using an alternative investment to pay off the loan, it is repaid when the house is sold, when you die or move into a residential home. You need to prove you can afford the monthly interest repayments to be approved for a RIO mortgage.
So they are more suitable for borrowers with a secure retirement income source like a defined benefit pension scheme. If you have less secure income or don’t want to commit to regular monthly repayments for the rest of your life, then a lifetime mortgage may be the better option, although there would normally be a larger amount to pay at the end. RIO mortgages are becoming more common and available form a wider selection of general mortgage lenders.
Things to consider
Releasing equity from your home may seem like a good option, but there are several important considerations:-
- Cost – Compared to an ordinary or RIO mortgage, Lifetime mortgages can be more expensive. They normally charge a higher rate of interest. Debt can grow quickly when rolling up interest. It is worth bearing in mind that house price growth might also be evident. The plan provider charges a higher amount of interest because they need to factor in safeguards. For example, a no negative equity guarantee means you never owe more than your home’s value, regardless of interest due. Another example is a fixed interest rate for the life of the plan.
- Term – There is no fixed ‘term’ or date for lifetime mortgages and RIO mortgages by which to repay your loan. The rate of interest will not change during the life of your contract unless you take additional borrowing. In this case, it will only be applicable to that cycle of extra borrowing.
- Value of home – Home reversion plans will usually not give anything near the sale value on the open market.
- Future needs – If you release equity from your home, you may be unable to rely on it for money later. For example, if needed for long-term care.
- Flexibility – If you decide to move home and take your lifetime mortgage with you, you may not have enough equity in your home if you decide to downsize later, and may need to repay some of the mortgage. In addition, if you change your mind unraveling the schemes can be complicated.
- Impact on state benefits – The money you receive from releasing equity may affect your entitlement to state benefits.
- Tax – If released from your main home usually you will not have to pay tax on the amount you receive. However, tax may be payable on any further investment of the proceeds.
- Fees and charges – You will have to pay arrangement fees of between £1,500 to £3,000, including solicitor and advice charges. There could also be additional charges. If you change your mind, there could be early repayment charges to pay, although these would not apply on death or long-term care planning.
- Estate planning – When you take an interest roll-up plan, there will be less for you to pass on as inheritance.
If you are considering releasing equity from your home, we can help you understand your specific circumstances and goals, and work with you to determine the most appropriate solution.