Homeowners and retirees looking to boost their incomes are increasingly using equity release products.
Giving homeowners a way to access the wealth tied up in their property, equity release can be an attractive option. It can give you a lump sum or pay over several smaller amounts. There are two main equity release options:
1. Lifetime mortgage: This is where you’d take a mortgage out on your home but retain ownership. You can choose to make repayments on the loan if you have enough income. Alternatively, you can allow the interest to accumulate. The loan amount, plus any interest incurred, will be paid when you die or move into long-term care.
2. Home reversion: This is where you sell a portion of your home and receive money in return. You have the right to continue living in the property until you die. The portion of the home you own will remain the same, even if the property’s value increases or decreases.
Equity release is proving a popular option during retirement. In fact, £11 million of property wealth is withdrawn every day to support later life finances, according to the Equity Release Council (ERC). The number of equity release products sold has grown by almost a quarter in the last year alone.
While equity release can give your finances a significant boost in retirement, there are drawbacks to consider before you start searching for a product. Some of the disadvantages of using an equity release product to weigh up are:
1. The debt can increase quickly
Depending on the type of equity release product you choose, the interest that is accumulating can increase quickly. This is a particular concern if you choose a Lifetime Mortgage and are not making any repayments on the loan.
The compounding effect means that what starts off as a reasonable amount of interest can rise very quickly. It may significantly affect the inheritance you leave loved ones or outgoings if you begin making repayments.
2. It may affect means-tested benefits
If you currently meet the criteria for means-tested benefits, be aware that taking a lump sum out of your home could affect your eligibility. This isn’t always the case but, in some circumstances, capital that you hold will impact on the support you receive from the government.
3. It will impact the inheritance you leave
If you’ve been planning your finances to leave an inheritance to your loved ones, your home has probably made up a big part of that. Using equity release will impact what you can leave behind. With both types of equity release products, there are options to ringfence a portion of your home’s value to ensure that it’s passed on. However, this will affect the amount you can access.
4. It’s difficult to change your mind
Once you’ve released equity from your property, it’s very difficult to reverse your decision. In some cases, it’s impossible to change your mind, in others it may be possible to repay the Equity Release scheme, although this is usually subject to substantial charges.
It may also restrict future opportunities, such as moving home. As a result, it’s important to weigh up the pros and cons before you go ahead.
What are the alternatives to equity release?
If equity release isn’t the right option for you, there are alternatives for you to consider.
- Downsizing: One of the most common ways to unlock wealth from your property is to downsize. Purchase a cheaper home and you could continue to own a house outright as well as having additional cash to fund your retirement aspirations. There are, of course, considerations to factor in here too, including any emotional attachment you may have to your current home and Stamp Duty.
- Use other assets: You might be surprised at how other assets can fund your retirement goals. Don’t jump into equity release without considering how other assets, such as savings or investments, can be used. This is an area that financial planning can help you with, demonstrating how decisions will have an impact on your finances.
- Ask loved ones for support: Depending on their situation, your loved ones may be in a position to offer you financial support if it’s needed. If you’re planning on leaving your home to children or grandchildren when you pass away, letting them know of your intentions is a good idea. They may be able to provide you with the cash needed instead of using equity release, particularly if your home will form part of their inheritance.
- Traditional mortgage: There are other ways to take money out of your property, including using traditional remortgaging products. You’ll need to prove that you can meet repayments and choose a provider that will be open to lending to a retiree but it’s a route that’s worth considering.
- Take up part-time or consultancy work: Giving up work on a set retirement date used to be the norm. But more retirees are now choosing to continue some form of work into their later years. It’s not an option that will suit everyone but looking into part-time or consultancy working opportunities could help you achieve your retirement goals.
Before you move forward with any decision, it’s important to understand what all your options are and where your finances stand. Financial planning can help you make the right decision with your goals and assets in mind, you may be surprised at the alternatives to equity release. Please contact us to discuss the ways you could fund your retirement plans.
