Western Daily Press (Saturday)
All you need to know about equity release
HARVEY JONES explains how you could unlock a fulfilling future from your house
TOO many pensioners are struggling to make ends meet, despite owning homes worth hundreds of thousands of pounds.
There is a name for this problem, “asset-rich, cash-poor”.
There is also a potential solution, known as equity release. This allows homeowners to unlock equity in their home and turn it into tax-free cash to boost their spending power.
We spoke to regulated, independent later life adviser Age Partnership, to help readers understand all the pros and cons when it comes to equity release.
It isn’t right for every homeowner, but it could work for you.
What is equity release?
Plans allow homeowners aged 55 and over to unlock the equity in their home and put it to work.
With the most popular type of scheme, known as a lifetime mortgage, you borrow money using your property as security.
You can release tens of thousands of pounds, depending on the value of your home, and never have to repay a penny in your lifetime.
The interest rolls up, year after year, with the debt repaid from the proceeds of your house sale after you and your partner either die or go into long-term care.
Any money left after the sale falls back into your estate and can be passed on to your loved ones as an inheritance in the usual way.
It has become more attractive as property prices soar, because it allows homeowners to release more equity, while falling interest rates have slashed borrowing costs.
Collectively, Brits own a record £4.6tn in property wealth. David Burrowes, chair of trade body the Equity Release Council (ERC), says equity release allows people to access this at affordable rates.
“It could help many retired people boost their pension income, adapt their homes or pay for domestic care support,” he says.
Demand for equity release is growing as people feel more confident. In the first three months of this year, more than 16,500 people released £1.14bn worth of equity.
Andrew Morris, senior equity release adviser at Age Partnership, says demand for lifetime mortgages is rising as more people are vaccinated and lockdowns are eased. He adds: “People are feeling more confident about making decisions around their later life finances.”
How safe is it?
For peace of mind, equity release comes with plenty of safeguards.
Perhaps the most important is that you and any partner retain the right to continue living in your home for as long as you live, or until you go into care. You might be able to move, too, subject to conditions.
All ERC members offer the nonegative equity guarantee. This pledges that you and your family will never have to repay more than the property is worth, even if house prices crash before you die – so loved ones won’t inherit any debt.
ERC members must also fix lifetime mortgage interest rates for the life of the loan, or set an upper cap.
They must set out all the costs of setting up the plan, the tax implications, and how changes in house values could affect your plan.
The market is regulated by the Financial Conduct Authority, giving right of redress if you are unhappy.
How much can I raise?
You cannot borrow the full market value of your home, but you take 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 upwards. That is because as your life expectancy reduces, the equity release company will not have to wait as long to get its money back.
So, at the minimum age of 55, you could typically release a maximum 27% of your property’s value. This rises to 50% by the age of 75.
You may be able to borrow higher percentages if you have health problems or lifestyle issues, such as drinking or smoking heavily.
You can take the money as a lump sum, with the average customer now drawing £123,028, according to the ERC. More than half choose a drawdown plan instead, where you start by taking out as little as £10,000, and more later if you wish.
ERC figures show the average drawdown customer takes £89,758 as a first instalment.
The two big advantages to drawdown are you only draw money as you need it and you only pay interest on the money you have taken.
A handful of plans even allow you to release money as a regular monthly income.
Whichever option you choose, you pay no tax on withdrawals.
What can I do with the cash?
You are free to spend the money on whatever you want, although if you have an outstanding mortgage, you will have to clear that first.
Growing numbers turn to equity release to help younger children and grandchildren put down a property deposit, buy their first car, or pay down debt, Andrew says.
“Many are using it to make a living inheritance, and enjoy seeing their loved ones benefiting from their property wealth.”
What does it cost?
Rock bottom interest rates mean that plans are cheaper than ever before with the lowest rates now below 3%.
Many lenders set a minimum property value of, say, £70,000, but there is usually no maximum value. You do not have to pass any credit checks, as you do not have to make any payments and your property is acting as security.
Who sells plans?
The market is growing rapidly and you can now choose from more than 500 plans, up from just 66 five years ago, according to Moneyfacts. Large, reputable companies such as Aviva, L&G and LV= offer plans, and Andrew says they come with a range of benefits and options.
Some give you the option to review and possibly switch after 12 months, if you see a cheaper or superior deal. Andrew says many policyholders don’t realise they can switch, and could save thousands by doing so.
Essential advice
Never rush your decision, as your home is almost certainly your biggest asset.
Rather than buying direct from the provider, take advice from a specialist, regulated equity release adviser who has trained in this complex area.
This should include an initial, noobligation consultation at no charge.
Check in advance what fees your adviser charges, – they are obliged to make this clear. You can expect to pay a flat fee of around £1,500 plus VAT.
Only use a firm offering advice from across the entire market.
Do not feel pressured at any point, Andrew says, adding: “You must feel free to make a decision in your own time.”
Back this up with legal advice from a trusted solicitor.
Any decision will affect your loved ones, so include them in the conversation to avoid shocks later.
A good adviser should always discuss other ways of raising the money you need, such as claiming state benefits, getting help from family, finding a part-time job or downsizing to a smaller property.
They should also discuss other products including the retirement interest-only mortgage.
The equity release payout may affect your eligibility for meanstested state benefits, so ask your adviser to check, Andrew says.
As a single lump sum, the average customer now draws £123,028