House prices have soared. Your home could be one of your largest assets, but the wealth is largely inaccessible. With prices rising, it’s not surprising that some retirees are planning to use their homes to fund retirement through equity release. Before you start the process though, it’s vital you understand how it works and the drawbacks says Paul Grennan, Principal Mortgage and Equity Release Adviser at Pembroke Financial Services.
According to the Halifax House Price Index, the average home in the UK is now worth £261,221 after an annual rise of 7.6% in the year to July 2021. Being able to access some of this wealth could make your retirement far more comfortable. It’s something over 20,000 families decided to do between April and June 2021. Homeowners collectively unlocked £1.17 billion of property wealth, according to figures from the Equity Release Council.
Paul said: “There are a variety of reasons why people may decide to use equity release. According to a Key report, 50% of people that have used equity release said it eased day-to-day financial worries. 32% said they now worry less about future finances.
“The report found that the most common thing to spend property wealth on is the home and garden, with more than half of people opting to do this with a portion of the money released. However, more families are using it to provide gifts to loved ones. In the first quarter of 2008, a fifth gifted some of the money from equity release; by 2021, this had increased to 26%.”
The figures also suggest that more people are using equity release to clear remaining mortgage debt to reduce their outgoings. In 2008, this was done by 18% of people; by 2021, this number had increased to 25%.
While equity release can provide you with more options, it isn’t the right decision for everyone.
5 things to weigh up before using equity release
1. It could affect means-tested benefits
If you are currently in receipt of means-tested benefits, receiving a lump sum through equity release may affect your eligibility. You should check if you’re considering using equity release as it could affect your day-to-day income and expenditure.
2. Interest accrued can increase rapidly
Paul added: “Interest rates are lower than they once were, but they can still add up quickly. When using equity release, you usually don’t make any repayments, which is part of what makes it attractive. However, as the interest is rolled up, you can end up owing far more than you expected due to paying interest on the interest already accumulated.”
In 2011, the average interest rate was 6.6%, but by 2021 it has halved to 3.3%. The table below shows how releasing £60,000 from your property can add up.
It is possible to choose an option that allows you to make repayments if you want to manage the debt. However, keep in mind that this will affect your regular outgoings.
3. You may not be able to reduce the debt without charges
While equity release may be right for you now, things can change. In some cases, you cannot reduce the debt or pay off the loan without incurring fees. If you think you may want to pay off the debt in the future, such as through an inheritance or by downsizing, keep in mind that your options may be limited.
4. You may not be able to move
Before using equity release, think carefully about how your home suits your needs now and whether this will change in the future. In some cases, you may not be able to sell your property to move. While you may happy there now, will this change in the coming years, or should you think about making adaptions now? For instance, if your mobility decreased in your later years, would you still be able to comfortably remain in your home?
5. It will reduce the inheritance you leave
Paul added: “As you’re accessing property wealth now, equity release can mean the inheritance you leave behind for loved ones is much less than expected. If providing a financial gift to family and friends is important to you, you should consider alternatives first. With some equity release options, you can ringfence a portion of property wealth to serve as an inheritance, but this isn’t always the case.
“It’s also important to note that you won’t be able to leave your home to loved ones. The property will be sold when you move into long-term care or pass away.”
Making sure equity release is right for you
Paul said: “While 56% of people that have used equity release said they had no regrets, others regretted the reduced inheritance and having to borrow later in life. By weighing up the pros and cons carefully first, you can ensure it’s the right decision for you before you move forward.
“Just as important as looking at the pros and cons of equity release is weighing up the alternatives. Depleting other assets or changing outgoings may make more sense for you. If you’re thinking about releasing equity to reach your goals, please contact us to talk through your options.”
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.