You had hoped when you reached retirement age that your pension and savings would be sufficient to cover all your bills and some. But with interest rates being so low for so long, you may not have nearly as much as you’d imagined. However, there is a way to get your hands on some extra money through a range of products called Equity Release. Dakota Murphey is an independent writer focused in the property and finance sector, keeping up to date with the latest updates from various news and opinions sites, including: BBC.co.uk, The Guardian and occasionally John Whyte Equity Release Sussex.
The Equity Release Council (ERC) develops government approval for equity release products to become mainstream products, and provides safeguards and guarantees for customer protection. There’s a choice of Equity Release options available: a lifetime mortgage or a home reversion. Let’s look at how both of these work:
- Lifetime Mortgage
You can take out a lifetime mortgage on your property and choose whether to make repayments or just let the interest accumulate. Some lifetime mortgages let you pay the interest portion only, while others allow you to pay off the interest plus the capital. (As interest charges accumulate very quickly, it’s advisable to select the option to pay off the interest or a portion.) You can also choose not to make repayments and the outstanding amount of the loan plus the interest is then repaid when you pass away.
- You need to be 55 or older to qualify for a lifetime mortgage.
- Interest rates can be fixed or variable, but if variable, there’s an upper limit which is fixed for the duration of the loan.
- You can borrow up to a maximum of 60% of the value of your property. The amount you qualify for is dependent on your age and the property valuation.
- You have the right to remain in the property for life.
- You can move to another property, as long as your product provider is happy that the new property provides enough security for your equity release loan.
- You can either withdraw the equity you release in small amounts or take it as a lump sum. (If you choose to withdraw smaller amounts, you only pay interest on the amount you’ve withdrawn.)
- Home Reversion
You can sell all or part of your home to a home reversion provider and, depending on the market value of the property, you’ll receive between 20% and 60% of the amount you sell.
You can then choose to receive either a lump sum or regular payments. You can continue to reside in the property, rent free, until you die, but need to maintain and insure the property. At the end of the agreement, the property is sold and the proceeds split, according to the proportions of ownership.
- You need to be 60, or in some cases 65, to qualify for a home reversion plan.
- The percentage you receive increases the older you are, but varies from provider to provider.
- Equity can be released in small amounts, or you can take it as a lump sum.
- You can remain in your property for life, provided it is your main residence.
- You can move to another property, as long as your product provider is happy that the new property provides enough security for your loan.
Equity release may appear to be a perfect solution but there a few things you should consider before entering into an agreement:
An equity release mortgage is very often more expensive than an ordinary mortgage. A higher rate of interest applies and your debt can grow quickly if you don’t have the option to pay back the interest.
A lifetime mortgage has no term or fixed date when the loan must be repaid.
With a home reversion plan, you don’t receive a true market value of your property as you would if you sold your property on the open market.
Any money you receive from equity release may well affect your entitlement to state benefits.
Depending on the type of plan you sign up to, you’ll have to pay arrangement fees of anywhere between £1,500 and £3,000.
Remember, if you don’t pay back any interest, there’ll be less for you to pass onto your family.
Seek out professional advice if you’re thinking of applying for an equity release product.
Advisers have to have specialist qualifications, which means they’ll be able to recommend the best plan for your specific needs. Make sure your adviser gives you a choice of most of the providers’ plans and check that the provider you choose is registered with the Financial Conduct Authority (FCA). A company on the register is strictly regulated, so you’ll the peace of mind that they’ll be around for a long time to come.