Every year older homeowners use Equity Release to help access millions of pounds to fund retirement. As property prices have risen significantly and time spent in retirement gets longer, it’s becoming an increasingly popular option. But is it one that’s right for you? You must weigh up the pros and cons before you proceed. Pembroke Financial Services’ Principal Mortgage and Equity Release Adviser Ian Potter explores five things you might not know about Equity Release.
The use of the term Equity Release usually refers to a Lifetime Mortgage. This is a mortgage secured against your home to release funds which are typically paid back when you pass away or move into long-term care.
In the second quarter of 2020, £698 million of property wealth was accessed by homeowners, according to the Equity Release Council. This figure was down by a third (almost £400 million) when compared to the previous quarter due to the economic impact of the coronavirus pandemic. Over 13,000 people used Equity Release to access property wealth during this period.
Ian says: “Equity Release can seem like an attractive option, but, it’s not right for everyone. It’s essential you understand the product and what it means for your long-term financial security.”
If it’s something you’d like to explore, here are five things you might not know about Equity Release.
1. You can make more than one withdrawal through Equity Release
While it is possible to take a single lump sum using Equity Release, this isn’t the only option. Depending on your lifestyle and goals, it may make more sense to make several smaller withdrawals over a longer period.
Drawdown Lifetime Mortgages accounted for 55% of Equity Releases between April and June. The average amount taken as the first instalment is £68,606, with £37,500 reserved for future use.
“This can provide more flexibility and act as a cash reserve for unforeseen events if needed. However, you need to keep in mind that further withdrawals will reduce the equity you hold in your home and increase the level of interest owed on the loan,” explains Ian.
2. You can pay the interest on your loan if you choose to
Ian continues: “Usually, Equity Release customers will make no repayments on the amount borrowed until the sale of the property when they die or enter long-term care. This means the interest owned is ‘rolled up’ so the debt gradually increases. Over a longer period, this can mean you owe far more than you initially borrowed.
“However, some products allow you to pay the interest or reduce the debt. Similar to a mortgage, interest rates may be fixed or variable. If you’re concerned about leaving a legacy behind for loved ones and have the income to meet repayments, this may be an option you want to consider.”
3. Most Equity Release products have a no negative equity guarantee
Research found that one in five over-55s were unsure if they could still leave an inheritance after releasing equity from their property. Most Equity Release providers, and all those that are a member of the Equity Release Council, offer a no negative equity guarantee. This means the amount owed, including any interest accrued, cannot exceed the value of the property. As a result, other assets you may want to pass on to loved ones remain unaffected.
But, as your home is likely to be one of the largest assets you own, Equity Release can affect the inheritance you leave. If you’d like to discuss your estate and how Equity Release would impact your legacy, please get in touch.
4. You have the right to remain in your home
Ian comments: “Not wanting to move home is often a reason people consider Equity Release. It’s a product that can release funds without having to downsize. With this in mind, it’s not surprising a common concern is that a lender would be able to force them to move out. 22% of over-55s believe they could lose their home or be forced to move.
“However, this is not the case when choosing a plan that meets the standards of the Equity Release Council. Borrowers have the right to remain in their home until the end of the loan. This is usually when you die or the property is sold to fund long-term care.”
5. You don’t have to own your home outright to be eligible for Equity Release
Finally, you don’t have to own your home outright to by eligible for Equity Release. If you’re still paying a mortgage, the amount accessible will be lower. Usually, you can borrow up to 60% of the value you own but lower restrictions may apply depending on the lender.
In fact, you can use Equity Release to pay off mortgage debt you may have remaining as you enter retirement. It’s a step that can reduce outgoings at a time when your income may decrease.
The drawbacks of using Equity Release
Having an additional source of income in retirement can be appealing. But there are drawbacks to Equity Release that you need to keep in mind too:
- The effect of compounding interest means the outstanding debt can rise quickly if you don’t pay off the interest.
- It will reduce the value of your estate and the legacy you leave behind.
- If you’re currently eligible for means-tested benefits, such as reduced council tax or pension credit, Equity Release could affect your entitlement to them.
- It’s often a decision that’s costly to reverse, you’re likely to face early payment penalties if you want to switch provider or pay off the debt.
Before you consider moving forward with Equity Release plans, you should assess your wider financial situation. You may have other assets that can help you achieve your goals without the drawbacks of a Lifetime Mortgage. Please contact us to discuss your aspirations and the options available to you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.