Equity release – your last resort to enjoy life?
An advert currently doing the rounds on TV depicts a husband & wife discussing the merits of releasing some of the equity from their property. He wants to enjoy his retirement and travel around the world (don’t we all?), but she feels guilty about spending their children’s inheritance. What to do?
The sort of policy they’re mulling over would let them access the money tied up in their home – hence the term ‘equity release’. You may be familiar with the phrase? It’s had quite a bad reputation in the past but, helped in no small part by legislation, it’s starting to be afforded more respect.
Nowadays it’s used for everything from funding travel, extending or upgrading properties, providing early inheritance gifts for children or funding later life care in the home.
The most common form is a mortgage – taken either in one lump sum or several smaller amounts – that isn’t paid off until you die and generally products fall into two main camps:
If you’re over 55, these allow you to borrow some of your home’s value at a fixed or capped interest rate. In contrast to a normal mortgage, you don’t normally make repayments to a lifetime mortgage so the interest rolls-up and can build rapidly as the overall amount you owe increases all the time.
As people’s needs become more complicated these products have tried to keep up. Some ‘drawdown’ versions allow you to take smaller amounts as and when needed – rather than one large lump sum – and to make interest repayments if you want.
About £4bn was taken from property wealth through lifetime mortgages in 2018. This may sound like a lot until you appreciate that the total amount of private property wealth in the UK is around £4 trillion!
Interest rates tend to be higher than normal mortgages and, although the rates have come down in recent years, equity release is still expensive.
Only 5 years ago you would have been paying around 6% but more recently the average has dropped below the 4% mark (this was before the Bank of England reduced their base rate to 0.1% so we wait to see how much lower that makes rates for equity release).
You would also have to pay arrangement fees, which typically range somewhere around £1,500-£3,000 depending on the type of plan being arranged. These cover costs like application fees, legal work and surveyor fees.
Home Reversion plans
These differ from lifetime mortgages in that you sell part of your house – usually below market value because the provider will have to wait years to get its money back – and then continue to live in the property rent-free.
There is no interest, but the provider owns a percentage of your property and will get its share when the property is sold. The more property prices go up, the more the provider will make out of the resulting sale in £ terms.
You need to be 65 or over to apply for a home reversion plan.
You would also have to pay arrangement fees, which typically also range somewhere around £1,500-£3,000 to cover costs like application fees, legal work and surveyor fees.
Paying it back
As with most things, equity release comes at a cost. For a start, it needs to be repaid if you leave to go into a care home or if you die (although note that if there are two of you this will only happen when the second one leaves or dies).
For many homeowners over 55, equity release can potentially be a way of achieving a more financially comfortable retirement. But there are many factors to consider and it is worth getting help before making a decision. There may be other options that are more suitable for your circumstances – for example, downsizing your property and moving to a smaller home. And bear in mind that equity release will generally mean there will be less money for your family to inherit.
If you are interested and would like to discuss your plans with an independent financial adviser with an equity release qualification, get in touch here.
We can also help with finding a way to fund your long-term care that is suitable for your needs and fits with your circumstances. Our qualified care fees advisers are accredited by the Society of Later Life Advisers and have extensive knowledge and experience of this complex market