Life is full of surprises. Even when you think your retirement plans are sorted, something can always crop up and hit your finances when you are least expecting it.
Covering the costs of unexpected medical bills, vital home improvements or simply replacing an ageing car, can have an impact on your retirement income.
With house price growth averaging nearly 590% in the last thirty years (Nationwide HPI), equity release is fast becoming an attractive option for those who want to enjoy their retirement in financial security.
Equity release enables home owners aged 55 or older, who are cash poor, but property rich, to unlock some of the wealth in their home via a cash lump sum, a regular income, or both, without having to move or sell their property. However, equity release is complex, so it is crucial to understand how the schemes work.
Lifetime mortgages are the most common equity release solutions and enable people to take out a loan on their property in return for a lump sum, an income or a combination of the two. Under the Lifetime mortgage scheme, borrowers continue to own the property. Usually, borrowers will not make monthly repayments and the debt will be repaid only when they die or go into long-term care. This results in the interest rolling up, quickly increasing what the borrower owes. Figures from the Money Advice Service show that a £45,000 loan taken out at a rate of 5% will have grown to £57,433 after five years and to £93,552 after 15 years. If the borrower lives for 25 years after taking it out, they will repay £152,387.
The most popular sort of lifetime mortgage is the "drawdown" version, designed for those who don't need a large cash lump sum at the outset. Instead, a pot of money is set aside for the borrower to draw from, as and when they need it. The borrower will only pay interest on the cash they release.
The Home Reversion schemes account for a small part of the market and mean people can sell all, or part, of their home to a company in return for a lump sum, or regular income and the right to remain living there. When the property is eventually sold, the borrower, or their estate only receives the percentage of the property's value that they still own. If, for example, someone sold 60%, they would only keep 40% of the final sale price.
The amount you can raise through equity release depends on a number of factors, including your age, your property’s type and value, and in some cases, your health and lifestyle.
The Financial Services Authority (FSA) currently takes responsibility for regulating equity release schemes, requiring members to adhere to a code of practice, including allowing borrowers to remain in their property for life.
Before you think seriously about equity release, consider your alternatives. Have you claimed all state benefits for which you are eligible, considered using other savings and assets, checked to see if your local authority can help you to pay for essential home improvements, reviewed you current retirement plans, or thought about renting out a room in your home? For many, the most effective way of releasing equity will be to downsize to a smaller property.
Like any financial decision you make, asking for advice is key. Extracting money from your home could impact upon many aspects of your finances, from your eligibility for means-tested benefits to the value of your estate when you die. You need to make sure you understand and plan for any negative financial implications associated equity release.