Once you have retired, you will probably find that you are no longer eligible to obtain certain lending privileges that you had been accustomed to when you were working and earning a regular income. And, whilst some people will have adequate provisions for their retirement, such as an occupational or personal pension and/or savings, for many, they will have to survive on the basic state pension which we all know is difficult.
So, What are the Options?
Many retirees who are homeowners find themselves “asset rich but cash poor”. In other words, they don’t have access to much cash and savings but they own a valuable asset in their house. Perhaps their pension isn’t worth as much as they’d hoped or their investments haven’t performed as well as they expected.
Equity release might be an option.
What is Equity Release?
‘Equity’ is the difference between the market value of the property and any claims held against it. To simplify, if your house was worth £150,000 and your mortgage was fully paid up, you’d have the full £150,000 equity against which to secure for borrowing purposes. Equally, if your house was worth £150,000 and you still owed £80,000 on your mortgage, then you’d have £70,000 worth of equity against which to secure for borrowing purposes.
Equity release plans are sometimes called lifetime mortgages, home reversion or home income plans and they are a way of releasing cash for any purpose. It may be to buy a new car, fund a holiday or make some home improvements. It can also be used for debt consolidation purposes or simply to make day to day life more manageable. Whatever you wish to use the money for, equity release essentially allows you to borrow money against the value of your home, with any debt being repaid from the sale of your house upon your death.
They can be extremely useful but can also be quite complicated to understand and are a major step for many people. Your house is almost certainly the most valuable asset you own and it is, after all, your home, so it’s important to seek sound advice before entering into any agreement. An independent financial advisor is highly recommended. They will look at your overall finances and tell you if equity release is the best option for you, bearing in mind that, in some cases, you may risk losing certain benefits as a result and there are also income tax implications so seek advice first.
What’s So Attractive About Equity Release Plans?
- They can provide you with a lump sum, a regular income or both
- The lump sum could be tens of thousands of pounds and the income boost might be worth a hundred pounds or more each month
- Money released from the value of your house is free of tax although there may be tax to pay on any income or growth if you then decide to re-invest the cash
- You don’t have to sell your house or move home to release equity. With a reputable equity release scheme, there is a cast-iron guarantee that you will be able to live in your home until you die and, in many cases, will still be able to leave something of the property’s value to your family if you have any.
- They can also be a way of cutting inheritance tax bills and paying for care bills
Equity release plans will not suit everyone however. There are many different types – home reversion schemes, interest-only mortgages, home income plans, lifetime mortgages and shared appreciation mortgages and all of them have their pros and cons so, once again, it’s crucial not to be too tempted by the freeing up of extra cash but to sound out professional advisers firstly.
If you have family, whilst equity release can be a useful way in legally reducing inheritance tax it also reduces the amount your family will inherit so it’s a good idea to discuss this with close family members and/or anyone who may have expected to inherit your home. Children or relatives may be prepared to help you out financially with, perhaps, an interest free loan, which not only reduces your costs but also allows them to inherit the property completely when you die.
Can You Sell Up and Move On Once You’ve Signed Up to an Equity Release Scheme?
You might find that, later on, you decide you do want to move into a smaller property or some place more suited to your needs or you may want to move into a care home or some other form of rented sheltered accommodation so it is important to check that any scheme allows you to do this or whether there is a penalty if you choose to leave the scheme before you die.
How to Avoid Any Risks?
Professional advice from a reputable independent financial advisor should be your first priority if you are considering an equity release scheme. You should also look for plans which carry the SHIP logo which stands for Safe Home Income Plan. SHIP is an industry body set up to promote safe equity release plans. Companies who are members provide guarantees including the right to live in your property until you die, the freedom to move to another home without penalties and that you will never owe more than the value of your home.