What is Equity Release
When it comes to retirement planning, an examination of finances may reveal that you need more money than you have set aside in savings.
It may also be the case that you are already retired, and have experienced a change in circumstance or unforeseen expenses that have left you short. In these cases, many people will turn to their biggest asset – their home – in a bid to free up some cash.
If you don’t want to move from your property but want to leverage the value of your home to put money towards retirement, releasing the equity from it could be an option. The other option some homeowners consider is downsizing to release equity.
What is equity release?
Equity release refers to schemes that let you access the money that’s tied up in your home, without you having to sell it.
You can take money out in a lump sum, in installments, or a combination of both. There are two equity release schemes, a home reversion scheme or a lifetime mortgage (the latter is more common). With a home reversion, a company will buy a share of your property, the value of which they’ll receive when the property is sold. However, because they won’t receive anything until the point of sale, the value of the share will be below market value.
With a lifetime mortgage, you essentially take out a secured loan against your home. The loan has a fixed interest rate, but you don’t have to pay the loan in monthly instalments. Instead, the debt accumulates, and is paid off when the property is sold or when you die. As the debt accumulates, so does the interest, but not to the point where you owe more than the value of your property.
Why release equity?
Releasing equity can be beneficial to those who have a shortfall in savings and need money for retirement, or who need cash to cover an unexpected expense.
It can be a great option for those who want to utilise the value of a property but don’t want to move house.
To qualify for a lifetime mortgage, you need to be over the age of 55, while home reversion schemes will require you to be over 65. However, as attractive an option as equity release may seem, there are some things to consider.
First of all, it can be incredibly costly in the long run. Research from consumer group Which? revealed that the amount owed on a lifetime mortgage of £40,000 at a fixed rate of 6.9 per cent doubled to over £80,000 in just 10 years.
Secondly, most lenders will require a minimum loan amount, which can be anything from £10,000 to £45,000. Lastly, your property will have to meet the minimum value specification of £70,000 for you to qualify for the scheme.
Alternatives to equity release
Equity release can ease your cash flow problems in the short term, but as mentioned, the amount that can accumulate in interest over the years can be substantial.
This means there is potentially not as much to pass down to your loved ones from the sale of your home after you die. If you have beneficiaries and you wish to leave them something, equity release may not be the best choice.
Instead, you may wish to turn to other investments or assets and examine options that don’t involve your home.
If you want to leverage the value of your property, downsizing could be another option.
By selling your property and moving into a home of lesser value, you can use the profit to pay for your retirement without having to compromise what you leave to your loved ones.
If you sell to cash buyers, you can receive the money right away, enabling you to move into something smaller and more convenient sooner.
Whether you want to release equity or sell and utilise the capital, using your property to fund your retirement can provide you with a number of options. If you are looking at selling property for retirement purposes then why not see how we can help?