Across the UK, private property is worth more than £6 trillion, according to an Equity Release Council (ERC) report. Property prices have soared in the last decade, but homes often don’t play a role in later-life planning as the wealth is locked away. Equity release is one option more retirees are considering. Paul Grennan, Principal Mortgage and Equity Release Adviser at Pembroke Financial Services, explains what you need to know about equity release.
In 2020, homeowners accessed more than £3.89 billion of property wealth through equity release. It can be a useful way to fund plans in your later years. However, there are drawbacks and it’s essential you understand the pros and cons before using equity release.
First, is equity release an option for you? All lenders have their own criteria, but usually you must:
- Be at least 55 years old
- Own property, which must be your main home and in a reasonable condition.
In some cases, you can still use equity release if you have a mortgage, but you will need to pay this off with the money you receive. Some providers may have a higher age threshold or will only accept properties that are above a certain value.
Second, what is equity release? There are two main types:
- Lifetime mortgage: This is the most common type of equity release. The money borrowed is secured against your home and repayments don’t have to be made until you pass away or move into residential care. The interest accrued will usually roll-up.
- Home reversion plan: With this option, you sell a portion of your home and retain ownership of the rest. You continue to live in your home until you pass away or move into residential care.
Paul said: “With both options, you don’t have to make regular repayments. As a result, equity release can be a way to boost your wealth without having to worry about day-to-day costs, but you do need to think about the long-term impact.”
2 benefits to using equity release…
1. Unlock wealth to fund your later-life plans
Equity release is a way to boost your funds in later life. You may want to use the money to support your day-to-day costs or to meet other goals, such as lending financial support to loved ones, renovating your home, or planning a once-in-a-lifetime trip. It can help you get more out of your retirement.
2. Remain living in your home
“Traditionally, retirees would sell their home and downsize to access property wealth later in life. But that may not be attractive for several reasons. Your current home may be adapted to your needs, located close to family and friends, or you may simply be comfortable there. Equity release provides a way of accessing this wealth without having to leave your home,” Paul explained.
…And 2 drawbacks
1. Debt can grow rapidly
Paul notes: “If you choose a lifetime mortgage, the interest on the loan is usually rolled up. If repayments aren’t made, the compounding effect can mean you end up owing far more than the initial amount you borrowed. Let’s say you use equity release to access £50,000 and have an interest rate of 4%. The first year, interest would add up to £2,000. However, compounding means that 15 years later, annual interest would be £3,593, with the total amount owed increasing to £93,423.
“Most equity release products now have a “no negative equity guarantee”. This means the total amount owed cannot exceed the value of the property, so it won’t affect the value of other assets.”
2. It will reduce your legacy
If passing on wealth to loved ones is a priority, remember that equity release will reduce the total value of the legacy you leave behind. It may mean that the inheritance of children, grandchildren and other loved ones is much lower than expected.
There are ways to ringfence a portion of property wealth to ensure it can be passed on, which we can discuss with you if this is a priority.
Is equity release right for you?
Paul concluded: “Using equity release to access property wealth is a big decision and not one to rush into. It’s important you first consider the pros and cons with your situation and priorities in mind.
“Even if you’re sure you want to go ahead, taking advice can help you pick the right option for you. There are many different equity release products to consider, and the market is becoming more flexible. For example, over three-fifths of lifetime mortgages now allow you to make repayments. The interest rate offered also varies hugely and will affect the cost of borrowing, so finding a competitive rate can mean you leave more behind for loved ones.”
If you’d like to discuss if equity release makes sense for you, please get in touch.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.