Are you approaching retirement but haven’t saved enough into your pensions pot? Perhaps you are one of the sandwich generation, stuck between funding your children’s education or help them onto the property ladder while also having to look after ageing parents?
Whatever the reason, many baby boomers choose to delay their approaching retirement because there’s just not enough money in the pot to fund their retirement.
One saving grace may be property ownership. After years of rising house prices, the total property wealth owned by the over-65 age group stood at a record £1 trillion in 2018. If you are one of the many elderly homeowners who are asset rich but cash poor, the option of tapping into the equity tied up in property as a source of funding may be an attractive proposition.
What is equity release?
“Equity release products are among the most highly regulated financial services products in the UK,” says the Equity Release Council whose members follow a strict code of industry standards to ensure safety and reliability for consumers. This group of products is now firmly cemented its place in the mainstream of financial planning for later years, putting to bed any negative publicity that early schemes once attracted.
So, what is the basic idea? One industry expert summarises the benefits as follows: “Equity Release utilises an asset – your home – which for most people is often their biggest asset, however it is an illiquid one. Having the ability to ‘draw’ on the capital value of your property can allow you to do many things to make your approaching retirement more enjoyable i.e. additional income, holidays, new car, home improvements but also home adaptations, care costs and continued independence.”
Using equity release is also a good way to transfer wealth between generations, while being able to pay for the little luxuries in life without having to move home.
The plans allow you to release cash from your property, with the interest on the loan rolled up and compounded on an annual basis. Interest rates are fixed for life and are currently at their lowest ever, with less than 3% not unheard of. If you are thinking of equity release as an investment vehicle, now may be an excellent time to do so. The minimum eligibility age for equity release is 55 years, but the average age for borrowers is 68-72 years.
Is equity release right for you?
Equity release can be a great solution for homeowners with unencumbered property, or those with an interest-only mortgage but no obvious means to repay the capital on the loan without selling up. You can use the released funds to pay off the mortgage, or help your children get on the property ladder, or even to buy a second home. You can elect to put the funds into trust as part of an effective inheritance tax planning strategy.
The most common option for equity release is a lifetime mortgage, which will be redeemed at the end of your life. There are two distinct products available:
Lump sum lifetime mortgage
Taking out this type of mortgage will allow you to receive the money tied up in your home in one cash lump sum. If you only wish to release a certain amount, or you have specific plans for the money, this might be a good option.
Drawdown lifetime mortgage
With this type of equity release mortgage, you will receive an initial lump sum plus an approved ‘cash reserve’ that you can draw on as an when needed. Interest is incurred on the amount actually taken, so compound interest builds up more slowly than if you had taken all the money upfront.
The other type of equity release product to consider is a home reversion plan. Available for the over 65s only, this type of product involves selling all or part of your home to a provider in return for a lump-sum payment or regular income payments. You retain the right to live in the property rent-free until you pass away, though you will have to maintain and insure the building. Home reversion plans have fixed ownership percentages rather than fixed interest rates, which makes them more financially attractive in a static housing market.
Equity release can be a convenient financial vehicle to allow you to stay in your own home as an alternative to downsizing, to provide extra retirement income or to free up cash for gifting or spending.
That said, you should never enter into any agreement without discussing the pros and cons with your financial adviser, and of course with your family. Interest charges can mount up, meaning your family could get a smaller inheritance or, in the worst case, nothing at all.
Make sure you protect your property with a ‘no negative equity guarantee’ so that what is owed can never exceed the value of the property. Also ask your equity release adviser about an ‘inheritance protection guarantee’ for your lifetime mortgage. This permits you to choose a fixed percentage of the property value to be protected on the eventual sale of the property. Here’s a handy calculator to see how much can be protected.
With sound independent financial advice tailored to your personal circumstances, a reputable equity release provider and the right safeguards in place, there is no reason why equity release shouldn’t be able to provide the financial safety for your approaching retirement.