For many people who are approaching and then entering retirement, the largest asset they have is their property. The challenge many have is understanding how they can use this asset to provide additional income or capital during their lifetime. Equity release is a possible solution. Chartered Financial Planner Sean McCabe discusses the options in his latest article.
What is Equity Release?
The equity you hold in your property is the difference between the value of the property and the amount of debt you have secured against the property. An equity release plan will allow you to access some of this equity.
Why release equity?
You can use the funds released from an equity release arrangement for a variety of different reasons and could include:
- Topping up your income
- Helping children and grandchildren
- Renovating or refurbishing your property
- Buying a second property
- Paying for holidays
- Adapting the home
- Funding hobbies and interests
An equity release provider will provide you with either a lump sum or an income in exchange for part of the value of your home. This is achieved either using a type of mortgage, or by selling that portion of your home on the condition that you can continue to live there as long as you wish.
No repayments need to be made on an equity release arrangement, however the solutions available now provide additional flexibilities that include making interest only payment, the ability to drawdown funds in the future, the ability to make ad-hoc capital repayments and the ability transfer the plan to a new property should you move. Most providers now offer a ‘no-negative-equity guarantee’, which means the debt will never be more than the sale value of the property. However, this could still mean that all the property’s value is used up in paying off the mortgage.
The minimum age for applying for an equity release plan is 55 and the debt only needs to be repaid from the sale of the property either on death of the last applicant, or the last applicant entering a care home. The amount you borrow and the level of interest payable will be determined by factors such as age, health, value of property and amount borrowed.
Mr and Mrs Jones are both 74 years of age, retired with one grown up son and two grandchildren. They want to treat themselves for their golden wedding anniversary by going on a world cruise and also provide funds to their grandchildren to act as a deposit on a new house. They owned their own property with no outstanding mortgage.
After receiving advice, they elected to release a capital lump sum that allowed them to pay for the cruise and also provide funds to their grandchildren. They decided to allow the interest to roll up on the plan but had the ability to repay capital of up to 10% of the amount advanced each year, if they wished to do so.
They had an excellent time on the cruise and have memories to last the rest of their lives, and they were able to see their grandchildren purchase their first properties using the funds they had provided as the deposit.
Things to consider
Equity release is not for everyone and consideration should be given to the following;
- Speak to an independent financial adviser or mortgage broker specialising in equity release. They can give you unbiased advice on whether it really is the best option for you and find you the best deal.
- Make sure the provider you use belongs to the Equity Release Council, so you are protected from pitfalls like negative equity.
- Establish to most appropriate solution to meet your specific objectives. Your adviser can help you with this choice.
- Consider how you access funds as interest accrues from the moment funds are drawn. Accessing funds in smaller amounts over a longer period could be more cost effective than accessing funds in one big loan.
- Also consider paying off the interest as you go or making ad-hoc capital repayments if possible as this will reduce the impact of the compound interest.
- If you are receiving any state benefits in addition to the state pension, check how these might be affected if you were to use equity release. The loss of benefits may make equity release poor value for you. Again, your adviser can help you work this out.
- Look at alternative sources of income, such as downsizing or renting out a room. Only by considering all your available options will you know that equity release is the best one for your circumstances.
- To understand the features and risks, ask for a personalised illustration.
What to do next
Get in touch today if you are considering releasing equity on 01225 308333 or email sean.mcCabe@mogersdrewett.com. Our advisers all have the required equity release qualifications and are also accredited by The Society of Later Life Advisers and are on hand to discuss matters further and answer any question you may have.
Equity Release Version 2 – 26.01.2023