As we get older, our thoughts naturally turn to ways to make retirement comfortable. At the same time, you may also want to think of ways to ensure you provide for your loved ones after you have passed on.
Some people have it all mapped out right in front of them and you may have plenty of investments and sources of income. Not everyone is a sure about their future however and planning for a comfortable retirement can be a tricky issue with so many options vying for your attention and your signature on a sheet of paper.
Owning your own home certainly gives you more options when it comes to planning for the future and keeping yourself financially secure. And if you’re over 50 you will be able to take advantage of some of the newer financial products on the market which help you unlock capital in your property.
Many over 55s have taken advantage of equity release schemes as a means of releasing cash. Because of how seemingly easier it is to earn cash using equity release, the equity release market has since 2016, seen a rapid growth rate of about 7.1% quarterly .
Despite this growth, equity release is still regarded as a confusing and complicated process and it’s important to ensure that you fully understand what it entails before you head into it. So, what do you need to know and how do you know if these products are right for you?
Equity release is majorly beneficial to elderly people and is usually only open to those who are at least 55
What is equity release?
Equity release is a way through which homeowners retain the use of their home, which has a capital value, while also obtaining a lump sum or a steady stream of income, using the value of the house. Usually, the income provided has to be repaid at a later stage, most likely when the homeowner dies or when they move to long term care. Due to the fact that the older you are, the more you can borrow when you use equity release, equity release is majorly beneficial to elderly people and is usually only open to those who are at least 55.
Types of equity release
There are two main classifications of equity release arrangement plans. You are allowed to choose whichever one you feel is more beneficial to you. They are:
This arrangement plan is the most popular form of equity release that people engage in. With this arrangement, the homeowner has a plan that works throughout their lifetime. A mortgage loan is obtained and no repayments are made until the death of the homeowner or until a move to long term care is made.
The amount that can be borrowed with this arrangement depends on the homeowner’s age, the value of the property and the health of the homeowner. This arrangement is categorised into various types so it’s a good idea to have a discussion with your advisor before proceeding, so that they can help you understand how they work and which one might be better for you.
Home Reversion Plan
With this plan, you sell all or parts of your home at a lesser value than its true market value. In exchange for this, you get a lump sum that is tax-free and/or a regular stream of income. You are also allowed to stay in your home, living like a tenant whilst not paying rent.
This means that all or parts of your home are no longer yours, but you get to earn cash and live in your home until your death or move to long term care. You should note that these are high risk products, so you should ensure that you discuss with an advisor who will help you fully understand what it entails.
What you should know about equity release
Although equity release can be a pretty good idea if you are thinking about earning extra cash without having to move out of your home, you should also understand that it can be a pretty expensive and sometimes complicated option. Below are a compilation of things you should consider before releasing the equity in your property:
- If, as a homeowner, you have people to pass assets to, equity release on your property will mean there will be less for them to inherit.
- Equity release is generally more expensive than most standard mortgages. For instance, some Lifetime Mortgages don’t allow you make monthly payments of interest thereby meaning a large accumulation on the amount of cash you would have to pay when it’s time for repayments.
- With a home reversion plan, you do not get anything close to the true market value of your home. So even if you get to earn cash for selling all or parts of your home and you get to keep living in it, there is a possibility that just selling the house in an open market might have been a better option.
- Releasing the equity locked in your home might affect your entitlement to some state benefits. As you get older, you become entitled to more benefits from the state, particularly after retirement.
- Once you have used your property to take one loan, you do not get to use it to take any other loan. This might affect your plans to take up long term care.
How much can you borrow with equity release?
Typically, the amount of money you can borrow when you engage in equity release is dependent on the type of arrangement you choose. However, it has been noted that lenders typically charge 5% on the amount of cash that is released from your home when an equity release is done. They usually allow you to borrow about 50% of the value placed on your property as a lump sum or as an income.
Also, the amount of money you can borrow is dependent on the combination of your age and property value. This means that equity release is usually more beneficial to people who are older. There are equity release lenders who provide calculating services that can help you work out how much you can borrow based on your age and your property’s value.
Applying for equity release
Once you have sought advice with a certified financial advisor, weighed alternative options and decided that you are going ahead with an equity release option on your home, the next step is to apply for the product.
Remember to only use lenders who are members of the Equity Release Council. The application process is largely dependent on the type of arrangement you decide to choose. A Lifetime Mortgage usually takes about 4-6 weeks while a Home Reversion Plan is usually about 2 weeks more.
During the process, your property gets valued by an appropriate surveyor who is able to tell you how much your property is worth in the market and your equity release provider will check your application for proper documentation.
Your solicitor’s job will be to cover all legal actions to be taken during the process and there will be a check for outstanding mortgages before a deal will be made with the lender. After application, a completion date will be chosen by your equity release provider.
How much does it cost to apply for equity release and how can you make the payment?
Generally, when you are about to engage in an equity release, there are usually three parties involved in the process. You have: your financial advisor, your lender and your solicitor. So, depending on the parties you choose to work with, cost for application can vary. Equity lenders may charge anything between nothing to £995 as an application fee.
You can make payments using the money that will released from the equity in your home or you can choose to add them to your loan. Some equity release providers have a “no completion, no fee” guarantee that ensures that you don’t make payments if your application is not accepted.
How safe are equity release plans?
You typically do not have to worry about the safety of an equity release plan if you choose to use services provided by a member of the Equity Release Council. You have to ensure that you work with a member of the Equity Release Council because they usually have a no negative equity guarantee that ensures that you do not owe more than the value of your property and debts are not left to your estate on your death. Equity release mortgages are generally regulated by the Financial Conduct Authority (FCA) .
Are there alternatives to equity release that you should consider?
Yes, there are. Before you consider releasing the equity locked in your property, you should note that there are alternatives you can consider that might prove to be easier and cheaper than an equity release.
For instance, you can decide to go for a standard interest-only mortgage rather than a Retirement Interest-Only Mortgage (RIO) because it is cheaper and repayment isn’t as extravagant as RIO.
You could also consider home downsizing and selling your property at its true market value. Usually the older you grow, the more your chances of enjoying certain benefits from your state. All these and more are what you should put into consideration before deciding to finally release the equity locked in your property.
Tips on making equity release easy for yourself
After you have found out all you need to know about equity release and you have decided that equity release is still your preferred option, you should consider these tips below to help you make equity release easy for you:
- Avoid borrowing all that you need at once and at an early stage. You should note that the sooner you borrow, the more time the interest has to compound thereby making it expensive when it is time for repayments. It is better you borrow in small chunks to keep interest payments at a minimum.
- Ensure that you get your services from a member of the Equity Release Council so you can avoid owing more than your property is worth. This provides you with a safety blanket when you decide to unlock the equity locked in your property.
- Discuss with your family members before you finally decide to take the step. Although you might be doing the release for their own benefits too, you should remember that the release might mean lesser assets for them to inherit and they might not like the idea of that. It’s advisable to have a discussion with them and get their views and to explain yours on the issue before you start the application process.
- Above all, ensure that you seek the services of a professional who can advise you and improve your understanding of the process before you go into it.
Pros and Cons of equity release
Like many other things in life, equity release has its advantages that can make it a great option, and disadvantages that can make it a not-so-good option. Understanding the pros and cons of equity release will help you decide and understand if it is a better option for you.
- With equity release, you enjoy low interest rates that are usually fixed for the life of the loan. Through this, you are able to know how much will be owed.
- Equity release allows your family members to inherit wealth without having to worry about inheritance taxes.
- With equity release, you have access to money for the future and you do not get charged interest until the money is drawn upon.
- Most lenders offer a ‘no negative equity’ guarantee that protects you from owing more than the value of your property.
- Choosing equity release will mean having to avoid moving or downsizing your property. Most people have sentimental attachments to their homes and might find it difficult to move out of them. Equity release can be a great idea in this case.
- There is mostly no need for monthly repayments as most equity release loans compound interest that will be paid at the end of the loan.
- You should note that usually, interests on equity release loans are added to the overall debt therefore doubling your debt.
- If you decide to abandon the plan earlier than you originally intended, repayment penalties can be really high.
- You could lose certain entitlements to means-tested benefits.
In conclusion, as much as releasing the equity locked in your home can seem beneficial, it can also be a complicated and an expensive process. You should ensure that you are fully prepared for the whole process before you begin. Also make sure to consult a certified financial advisor to help you decide if it is the best option for you or not.