Unlock the cash in your home and relax in retirement

RECORD HOUSE PRICES ARE MAKING EQUITY

OLDER homeowners struggling to cover today’s rocketing living costs could enjoy sweet release from money worries by using their property to raise much-needed cash.

People who own their home can unlock spare equity in their property and turn it into tax-free cash to spend as they wish.

It’s possible by taking out a regulated financial product called an equity release lifetime mortgage.

They are offered by a range of specialist companies, including big names Aviva and Legal & General, and demand is growing as house prices rise, allowing people to access equity.

The average equity release customer raised almost £125,000 last year – the kind of money that can change lives. If you have an outstanding mortgage, however, you must clear that first.

Equity release can transform your retirement but taking out a scheme is a big decision and will affect the size of any inheritance you will leave loved ones. So don’t rush it.

Make sure you understand what this option is and how it works.

What is equity release?

Equity release schemes allow homeowners aged 55 and over to unlock the capital sitting in their property and put it to work.

The average house is now worth a record £278,123, according to Halifax, handing millions of older homeowners a vast store of untapped wealth.

Many will have bought their house 30 or 40 years ago, and have long since paid down the mortgage, leaving them with heaps of spare equity. Yet at the same time, many are short of cash to pay their everyday bills, something known as being “asset rich, cash poor”.

While most will want to pass on their home to children and grandchildren when they die, they now have another option.

In contrast to a standard mortgage, you do not have to make any monthly interest payments when you take out an equity release lifetime mortgage.

Instead, the interest rolls up and is cleared, along with the money you borrowed, from the proceeds of your house sale when you and your partner either die or go into longterm care.

Any property value left falls back into your estate and can be passed on to your nearest and dearest as an inheritance in the usual way.

How does it work?

The big attraction is that you have the cast-iron right to continue living in your home for life, provided you choose a plan from a company that belongs to trade body the Equity Release Council (ERC).

You might even be able to move home if you wanted to, subject to certain conditions.

You cannot borrow the full market value of your home, instead it is a percentage based on your age.

The older you are, the more you can raise, because as your life expectancy reduces, the equity release company will not have to wait as long to get its money back. It can therefore pay you more.

So aged 55, you could typically release a maximum 27% of your property’s value. For instance, if it is worth £250,000 you could borrow up to £67,500.

Equity release tends to work best for those age 65 and upwards. By age 75, you can borrow 50% of its value.

You may be able to borrow higher percentages if you have health problems or lifestyle issues, such as smoking heavily.

That’s because your life expectancy is shorter, which means the equity release company does not have to wait as long before your home is sold.

Last year, 76,000 homeowners tapped into £4.8bn of housing equity, most of them for the first time.

That is a rise of a quarter on 2020 and with the average house price increasing £25,000 last year, owners can borrow more.

Stephen Lowe, group communications director at retirement specialist Just Group, says demand is up as people who delayed financial decisions in the pandemic chose to crack on with plans.

“Rising house prices, historically low interest rates and a high level of competition between lenders is tempting people to consider using some of the value tied up in their homes,” he added.

Where homeowners took a lump sum, the average amount raised was £124,990. Others drew an initial sum and kept some cash in reserve for later, in what is called a drawdown plan. In this case, the average upfront sum was £89,786, with £34,950 held back for future use, making £124,736 in total.

Some plans even allow you to release money as a monthly income, a bit like receiving a salary.

Claire Singleton, chief executive of Legal & General Home Finance, says demand for equity release will continue to grow in popularity.

“Homeowners increasingly see their property as an acceptable way of raising cash in retirement.”

Take advice first

If you’re tempted, do not rush your decision, as your home is almost certainly your biggest asset – and equity release is complex.

Any decision will affect your loved ones, so remember to explain what you are doing, and include them in the conversation to avoid shocks later.

Matt Stirland, executive director of later life lending at equity release adviser Age Partnership, suggests talking to an advisory firm that specialises in equity release, that will have detailed knowledge of all the issues involved.

They should also discuss alternative methods of raising the money you need, such as claiming state benefits, getting help from family, taking a 25% tax-free lump sum from your pension, finding a part-time job, or downsizing to a smaller property.

“Equity release could affect your eligibility to state benefits, and your adviser should check whether this is the case,” Matt said.

Advisers should offer you a free, no-obligation consultation and clearly set out their fees. They are obliged to make this clear and a good one will be happy to do so.

Typically, you can expect to pay a flat fee of around £1,500 plus VAT.

Beware those who charge a percentage fee, as this could prove more expensive.

Only use a firm that is able to offer advice on the full range of equity release plans, rather than simply selling their own product, or products from a limited panel.

Do not be pressured at any point. You must feel free to make a decision in your own time. The whole process will typically take up to two months.

“This is a long-term commitment so you really need to understand exactly what it involves from start to finish,” Matt added.

Don’t be afraid to talk to loved ones. Often, children will encourage parents to go ahead and make the most of their retirement.

RELEASE A MORE TEMPTING OPTION, SAYS HARVEY JONES

Last year, 76,000 homeowners tapped into £4.8bn of equity

Equity release can help those who are asset rich but cash poor

Discuss your plans with those whose inheritance is likely to be affected