Equity release

Is equity release right for you?

By Peter Carr Tuesday 20 March 2018
 

If you’re nearing retirement age, you may be thinking about how you are going to fund your later years. Find out how equity release could help.

A detached house

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If you own your home, one viable option to improve your finances after retirement could be an equity release plan*. These plans or schemes release capital that is tied up in your home to supplement your finances.

You can do this even if you are already retired, but you must be aged over 55, own your home and be willing to release up to 60% of your home’s value.

*Plans are regulated by the government’s Financial Conduct Authority, which means advisers and product providers are obliged to adhere to published standards in terms of their knowledge and the way they run their businesses.

Guide to equity release

An equity release mortgage lets you release cash from your property without leaving your home – so there’s no upheaval or expense. But you need to be a UK homeowner between the ages of 55 and 95 to be eligible for one of these schemes.

The money you release can be used for anything you need it for, such as supplementing your pension or going on a big trip. Depending on the type of plan you choose, there are typically no monthly repayments. This means there is no reason to worry about the long term, as you can stay in your home for life, or until you choose (or need) to move.

Why woud you consider equity release?

There many reasons why you may decide to release some of the equity in your home.

For example:

  • You may need to supplement your pension.
  • You may want to pass on money to your family while you are still alive.
  • You could want to go on a once-in-a-lifetime holiday or trip.
  • You might want to redecorate or renovate your home.
  • You may need to pay off a loan, clear a mortgage or pay off a residential mortgage. 

What types of equity release plans are available?

Because there are many equity release plans on the market, it’s vitally important to seek expert advice, independent of the mortgage brokers. You should compare the whole market to get the right deal for you and your circumstances.

There are two main types of equity release plan:

A lifetime mortgage: This type of loan is secured on your property and is called a lifetime mortgage because you will not need to make monthly repayments after you get your lump sum. Instead, the interest is ‘rolled up’, meaning you pay it at the end of the loan (usually your death) plus the loan amount, when the property is sold.

A home reversion plan: This type of equity release sees you selling all or part of your home in return for either a tax-free lump sum or a regular income to bolster your pension. The home reversion plan includes a guaranteed lifetime lease, with no monthly repayments to meet, so you can live at home for free until you die. After your death, the house is then sold and the lender gets back its percentage share.

Save money with a drawndown plan

When considering releasing cash from your home, you may want to think about a plan with a drawdown facility. This is basically a flexible equity release scheme that allows you to release the funds over a period of time, or to “draw down” as and when you need the money.

The biggest benefit to this approach is that you can reduce the amount of money owed when the plan comes to its end. This is because you only start to accrue interest on the released funds when you actually withdraw it.

What else should I know?

Thousands of homeowners have already unlocked the cash tied up in their homes to give themselves a much-needed cash boost.

However, it’s important to remember that taking out any kind of equity release plan will reduce the value of your estate. It might also affect your entitlement to state benefits, taking you over strict monetary thresholds.

If you decide to take out an equity release product, ask the adviser before you sign anything:

  • Do they have any fees?
  • What types of equity release products do they offer?
  • Are there any other fees you’ll have to pay (e.g. legal, valuation or set up costs)?

Is there anything else to consider?

Many equity release providers are members of the Equity Release Council, which has a Code of Conduct to help ensure your financial safety. If you’re considering taking out an equity release plan it’s worth seeking out plans approved by the ERC.

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