Cashing in
Equity release is allowing more and more older homeowners to bankroll their own retirement and help out their families
FINDING yourself short of cash in retirement is hugely frustrating as it stops you from doing all the things you want to do, such as paying bills, doing up your home, having fun and helping your family.
Nobody wants to spend their final years worrying about every penny, or seeing loved ones struggle while being unable to help out.
If you own your home, one option is to unlock the capital sitting idle in your property, using an increasingly popular product called equity release.
With equity release, you borrow against the value of your home but do not have to make any repayments for the rest of your life. You don’t have to undergo any credit checks or meet stiff eligibility criteria because you are using your property as security.
Equity release is now an established product sold by mainstream lenders such as Aviva, Legal & General and LV=.
It is regulated by the Financial Conduct Authority (FCA), which reduces the chance of a mis-selling scandal and gives you redress if you are given poor advice.
It can seem complicated and you should only take out a plan after talking through all your options with a regulated independent financial adviser who specialises in this sector.
You should take separate advice from a trusted solicitor as well and, most importantly of all, talk to your family before making a decision.
Equity release is a family affair. While most unlock the equity in their property to improve their own financial position, growing numbers are keen to help those they love.
New research from specialist later life advisers Age Partnership shows that six out of 10 who were considering equity release would first discuss their plans with their family and friends.
Andrew Morris, senior equity release adviser at Age Partnership, always encourages his clients to involve family in financial discussions, as early as possible: “In years gone by, talking about money was deemed taboo but thankfully things are starting to change.”
He said a vast number of his clients are happy to talk to their family about their financial situation: “In particular that they are exploring the possibility of releasing equity from their homes.”
Morris said equity release is a lifelong commitment that can impact family members later down the line. Unlocking capital from your property can reduce the size of the inheritance your loved ones receive when you die. At the same time, it could help them get on today.
HOW IT WORKS
Equity release allows homeowners aged 55 and over to unlock the equity in their property and boost their everyday spending power.
You do not get the full market value of your home but a percentage based on your age. The older you are, the more you can raise, so equity release tends to work best for those aged 65 and over.
With the most popular type of equity release product, called a lifetime mortgage, you borrow a lump sum against your property but do not have to pay any interest in your lifetime (although you can if you wish, on some schemes).
The interest rolls up year after year and is eventually repaid, along with the original sum, from the proceeds of your house sale after you and your partner either die or go into longterm care.
During that time you have the right to continue living in your home and may even move if you wish, subject to certain conditions.
For peace of mind, product providers who are members of industry trade body the Equity Release Council (ERC) offer plenty of safeguards.
One of the most important is something called the “no-negative equity guarantee”, which pledges that you or your family will never owe more than the sale value of your home, regardless of what happens to house prices after you have taken out a plan. To qualify, you will have to pay off any existing mortgage on your home but can use the equity release payout for that.
UNLOCK WEALTH
Last year, more than 85,000 older homeowners collectively released almost £4 billion from their properties, a record number of customers, as confidence in the market grows.
The average new customer who took out a lump sum unlocked a hefty £97,282, which is triple the annual income of a retired couple, according to ERC figures.
This could be a lifeline for many during the Covid-19 pandemic as the over-55s are among those hardest hit by job losses.
Greg Neilson, equity release managing director at provider Aviva, said demand for lifetime mortgages remains buoyant: “The most popular reasons for taking the product continue to be home improvements, holidays and paying off debts and mortgages.”
Drawdown schemes are
particularly popular because they allow you to take a small lump sum at first with the option to release more equity later if you wish, with no additional fees. Another advantage is that you only pay interest on the money you have actually taken.
The average first instalment on drawdown plans was £68,606 in the first half of this year, with a further £37,500 typically reserved for future use, ERC figures show. Chairman
David Burrowes said property is now one of the nation’s main sources of wealth: “Homes will play an increasingly important role in bridging the savings gap for older homeowners who are asset rich but cash poor.” He said releasing equity is not right for everyone, so take your time over any decision: “Structured financial advice, independent legal advice and clear product safeguards make it safer.”
Matt Burton, retail director at equity release lender Hodge, said people should talk to an adviser who can discuss other ways of raising money in later life, such as retirement interest-only mortgages.
These are similar to equity release, the major difference is that you repay the interest during your lifetime (but not the capital) which means you must show you have sufficient income to do this.
Lifetime mortgage interest rates are higher than on standard mortgages but have fallen sharply over the past five years, to an average of 4.21 per cent. Pure Retirement’s Classic Super Lite product now charges the lowest equity release rate ever, at 2.28 per cent.
Andrew Morris, at Age Partnership, said low interest rates make equity release more attractive: “The interest you owe will roll up in a slower rate and more of the proceeds from your house sale will go to your loved ones, after the capital and interest have been paid off.”
House prices are rising again, boosted by the stamp duty holiday, and this may make it possible to borrow more money from your home. Morris said a good later life adviser will review all your finances: “They should examine any mortgage, unsecured debt or pensions you have, before recommending a course of action.
“The decision has to be the right one for you.” Always confirm fees before pressing ahead. Age Partnership offers initial no-obligation advice for free. You only pay a fee if your case completes, typically 2.25 per cent of the amount released (minimum charge £1,695). If you do not proceed, there is nothing to pay.