How to release equity from your home
Many of us are putting nothing away to help fund our old age and around half are not saving enough into our pensions for a comfortable retirement.
If you bought your home a long time ago, you are likely to have benefitted from the boom in house prices during the early noughties, and even the recent price falls are unlikely to have dented your equity position too much. According to Halifax the average UK house price was £85,000 in 2000, compared to £222,000 at the end of December 2016. That’s all well and good, but you can’t pay your gas bill out of your home’s value. At least not directly.
This is where equity release comes in. It helps asset-rich, cash-poor homeowners to release the money tied up in their property, giving them the means to enjoy their retirement now.
Equity release is definitely becoming increasingly popular: the latest figures show that sales of equity release in the third quarter of 2012 were up 21% on the previous year.
How does it work?
There are two types of equity release scheme and they are very different. With both products you are able to live in your home, rent-free, for the rest of your life or until you move into long-term care. And both are usually available to homeowners aged over 55 who want to access the equity in their property:
Lifetime mortgages: With a lifetime mortgage you can release equity from your property, either as a lump sum or through a drawdown arrangement (where a maximum sum is agreed and you take out the money as and when you need it). You don’t usually make monthly repayments to your lender (unless you want to), but instead your interest rolls up and is payable on the sale of your home, when you die or move into long-term care.
Because the interest rolls up, the longer you hold the mortgage, the greater the amount owing when you die. However, most deals come with a ‘no-negative equity’ guarantee, which means your estate will never owe more than the value of the property, so they won’t be out of pocket.
Home reversion plans: A home reversion plan is where you sell all, or part, of your property in return for a tax-free lump sum. The percentage you decide to keep in your property stays the same no matter what happens to property prices. So if you sell 50% of your home to the reversion provider and keep 50%, your estate will get half of the eventual sale price of the property. The property’s value could increase after you take out the plan, or it could fall, but your share remains the same.
Advice is essential for those considering an equity release plan because they are more complex than standard mortgages. They also have a direct impact on your inheritance, which usually affects your close family, so it’s vital that you understand what you are signing up for, any alternative options you may have, such as downsizing, and whether a home reversion or lifetime mortgage is better suited to your needs.l
Get a lawyer
You should also take independent legal advice in addition to financial advice to ensure that you understand the impact that an equity release scheme will have on the inheritance you are able to leave behind.
Most people choose to involve their close family in their equity release decision, particularly if they are the beneficiaries of your will, because it will have an impact on their future finances too.
The Equity Release Council website is a good place to start if you are thinking about releasing equity from your home as it allows you access a directory of members that have pledged to observe an industry code of conduct, which includes a guarantee that you will be provided with a fair and easy-to-understand presentation of any potential equity release plan, including its limits and benefits as well as your obligations.
Equity release is certainly a valuable and a valid way to help fund your later years. Just make sure you get independent, professional financial and legal advice about whether or not a scheme is right for you and your family.
Pros and cons of equity release
Security of tenure: Stay in your property for life, or until you move into long-term care
Access your wealth: Get your hands on your equity, as a lump sum, or regular payments, without having to sell your home
No monthly payments: The interest on a lifetime mortgage is paid on your death (or if you move into long-term care)
No-negative equity guarantee: You or your estate will never owe more than the value of your home.
Impact on inheritance: Releasing equity will reduce the amount that is left to your family or estate from your home when you die
Not the only choice: Consider other ways to raise funds, such as downsizing to a smaller property or different area, using savings, or borrowing from family members
State benefits: Equity release can affect your eligibility for certain State benefits and have tax implications. Check this out first with a financial adviser or legal adviser.