Over the past few decades, soaring house prices have resulted in a buoyant property market. As more and more homeowners approach retirement age, equity release schemes have become an increasingly popular way to top up income while allowing homeowners to stay in their current property.
To help you get an idea of how much equity is in your home and how you could spend it, there are a number online calculators such as SunLife's Dream Shopping Basket.
What is equity release?
Equity release refers to the process of releasing or 'unlocking' part or all of the excess value on a property – excluding what is still owed on any mortgage.
To qualify for an equity release scheme, applicants must be in their mid 50s, although some schemes start at 60, and should own their home with no mortgage or have only a small loan outstanding. There are two types of equity release:
Lifetime mortgage
A lifetime mortgage allows a loan to be secured against your home. This means you still own your own home and the loan is not repaid until you die or move into long-term care and your house is sold. Homeowners can take out a 'lifetime mortgage' and still 'own' their home.
Home reversion
With 'home reversion' you effectively sell part or all of your home to a third party (home reversion product provider), which means that a percentage of your home will be owned by someone else. You have the right to live in the property until you die but have to agree to maintain and insure it.
What can you do with equity release?
If you have equity in your home but not as much cash as you’d like in your retirement, equity release is an attractive option. The extra funds could be used to live more comfortably, make home improvements, help children or grandchildren with a mortgage or university fees, it’s up to you – the money is yours to spend as you wish.
The average cost of a terraced UK property in January 2017 was £187,000 (Gov.uk), with this as a start point you can assess how you could use the released funds.
For example:
Taking the £187,000 figure as an outline, you can play around with Dream Shopping Basket to see how equity release could help with a few 'big ticket' events that might be difficult to fund or otherwise remain out of reach in retirement.
Roof repairs
You have some wear and tear on our property and you need to get them fixed ahead of the winter. A builder is hired to do some new roof repairs at a cost of £4000.
Family holiday
You might not see your family as often as you'd like, so a shared holiday is the ideal way to enjoy some quality time with the kids and the grandchildren. Cost £3000
Deposit for a mortgage
The housing market has been kind to your generation but not so for younger people. By releasing equity, you can help a grandchild get his/her foot on the property ladder. Cost £15,000
Investment or indulgence
The final two considerations were pure vanity but also potentially add value as investments.
With the property market so buoyant, spending to add value to your home could be a sound investment. Home improvement such as loft conversions, extensions or conservatories can boost value if you plan to sell it on in the future, if you plan to downsize, or if you move into long-term care. Cost £14,000
Finally, you could live the retirement dream by freeing up cash to invest in a holiday home, which could also become a source of additional income. Cost £150,000
Like all financial considerations there are benefits and disadvantages to equity release schemes:
Advantages
- Homeowners receive a substantial sum of cash to spend or invest, as they are entering their retirement period.
- In the case of the lifetime mortgage, ownership of the property is retained and homeowners can benefit from any subsequent rises in house prices.
- With equity release schemes improving and the sale of schemes being regulated by the Financial Conduct Authority, many now contain a 'no negative equity guarantee' so that the homeowner's estate is not liable if the final debt exceeds the property value. This is part of the ERC (Equity Release Council) standard.
- With all schemes the lump sum released is tax free.
Disadvantages
- Equity release schemes may charge high interest rates and set up charges.
- Certain people who cash in on their house via an equity release scheme may suffer a loss of entitlement to means tested benefits.
- These schemes can result in a reduction in the value of the homeowners estate meaning that there is less to pass on as inheritance.
- The schemes can lead to increased amounts of debt.
- There is a possibility that further amounts may not be borrowed on the property in the future
- Income tax may be payable on the income produced by the invested capital
What does it cost?
Make sure you are aware of all the costs before going ahead. You might have to pay:
- Buildings Insurance
- Legal fees and valuation fees
- An arrangement fee to the lender for the product
- A fee to an adviser for their advice and helping you set up the scheme
- A completion fee, which can be paid at the point of completion or added to your mortgage.
These costs might add up to between £1500 – £3000.
There might be extra costs for paying off your loan early, known as ‘early repayment charges’.
It is sensible to consider all options available. Downsizing is a popular alternative to equity release and enables the homeowner to benefit fully from the investment they have made in their property.
Anyone considering easing the financial burden of retirement with an equity release scheme should seek advice from an independent source. Some financial advisors earn commission and fees on products they recommend so ask them to disclose any relationships they hold with the equity release product provider. Signing up to an equity release scheme in many cases will be the last major financial transaction you make. It is a decision that affects your home, your future and that of your beneficiaries, so it is worth going the extra mile to ensure you understand not only the positive impact it can have – but also the negative implications, too.
About the Author / Gareth Hargreaves
Gareth looks after all editorial content on 50connect. He is the Swiss Army knife of content ideas and production.
