What Is Equity Release?
Equity release is a financial product that homeowners over the age of 55 can use to release some of the value tied up in their property. This money can either be paid as a lump sum, or as a steady income, for a number of years.
There are two forms of equity release: lifetime mortgages and home reversion plans.
How Does Equity Release Work?
A lifetime mortgage is essentially a loan secured against your home. There are no monthly repayments to be made, and you keep full ownership of the home. When the home is sold, usually following the homeowner(s)’ death or a move to residential care, the amount that was borrowed must be repaid, with interest, to the equity release provider. Any equity that’s left after the lifetime mortgage has been settled then passes to the homeowner(s) if still alive, or to their estate.
Home Reversion Plan
The other option – a home reversion plan – is where all or part of the property is sold to an investment company. The occupant(s) continue to live there, rent free, until death, or until the home is sold. Because you are able to stay in the home, the amount paid by reversion companies is usually less than the actual market value of the property.
Should Equity Release Be Part of My Retirement Planning?
Equity release has traditionally been viewed as a last resort; a back-up plan for retirees who run into financial trouble. For many, the idea of actively building equity release into your financial plans for retirement can seem peculiar. But changes in the property and pensions markets, shifting saving habits, and lengthening lifespans have all contributed to an increase in the number of people releasing money through equity release.
According to the FSA, 25% of mortgages sold since 2005 won’t be paid off by the time the borrowers reach retirement, and 5% of those who have taken out mortgages in this period are still expected to owe money into their 80s.
The FSA has also reported that 80% of homeowners with interest-only mortgages have no strategy for repaying them. The Telegraph recently published an excellent article giving examples of when equity release is the right solution for people in this situation; essentially, “the older you are, and the greater your equity in relation to the mortgage, the better your chances.”
What Do Parents Need to Know About Equity Release?
If you’re a parent, equity release comes with additional implications – by unlocking the value of your home to fund your own living costs, you are sacrificing at least some of your children’s inheritance.
Whilst it’s inevitable that this will cause some tension between retired parents and their offspring, the development of ‘inheritance guarantees’ has softened the blow to some extent, and research has shown that the overwhelming majority of equity release customers are discussing the decision with their children before going ahead.
Whilst many retirees rely on equity release to cover their own expenses, there is also an emerging trend whereby the funds released are passed straight to the children, often to help them pay off their own debts, or enable them to get on the property ladder. Again, however, this will result in a reduced inheritance, or, in some cases, no inheritance at all.
What’s Happening in the Equity Release Market Now?
The cost of equity release schemes have fallen by around 1% in the last year. That might sound insignificant, but on a long-term lifetime mortgage, it can make a massive difference. If you’ve already got a lifetime mortgage, it’s possible that you could save money by changing to another provider.
Schemes designed to allow older people to access the money tied up in their homes are falling in cost, and advisers say that anyone who has an existing equity release mortgage may be able to save money by switching deals.
Whether you’re looking at equity release now or thinking about making use of it in the future, it’s vital that you seek independent financial advice and take the time to understand all the options before making a commitment – the Equity Release Council website is a great starting point if you’re looking for unbiased advice.