If you don’t have enough money to live on in retirement and you own your own home, you may think about equity release. How does it work and what should you look out for?
Raise a mortgage or sell your home?
If you want to release equity from your property but you don’t want to sell it, you have two different options through equity release:
1. A lifetime mortgage: Here, you take out a loan (like a mortgage) against the value of your home but with most lifetime mortgages, you never have to make any payments. Interest builds up every year and the loan is paid off either when you die or when the house is sold.
SAVVY TIP: With some lifetime mortgages you are able to pay interest. However, if you don’t have an equity release mortgage where you’re able to pay interest, so you never make any mortgage repayments, the unpaid interest ‘rolls up’. This means the debt can grow significantly. Depending on the interest rate you’re charged, your debt could double every seven to 15 years.
2. A home reversion plan: Here you sell part or all of your home to an insurance company. You have the right to continue living in there until you die ‘rent free’ (although you’re normally responsible for all the maintenance and any service charges). When the property is sold, the insurance company takes its share.
SAVVY TIP: If you sell part of your property through a home reversion scheme you’ll only get a percentage of its true value – typically between 30-60%. The older you are, the higher the percentage. You’ll also miss out on any rise in value of the percentage you sell to the insurance company after you’ve sold it, so if property prices rocket away you could really lose out.
Where to start
Your starting point is to make sure you get good quality advice from someone who’s independent. Talk to an independent financial adviser or a mortgage broker who specialises in equity release. See if you can pay a fee rather than letting them receive a commission. Talk to someone who can look at products offered by all the companies in this market and not just one or two.
SAVVY TIP: If you can, try and talk to someone who’s already done equity release before you go ahead, preferably someone who took out their equity release product at least 10 years ago. When I speak to people who have taken out equity release mortgages, they are often very positive about it in the first couple of years but rather less so once they realise how expensive it has been.
Here are my tips on what you should do:
1. Look for products offered by companies that have signed up to a code of conduct. All providers that are members of the Equity Release Council have to guarantee that you will never owe more than the property is worth and you can live in your home for the rest of your life.
SAVVY TIP: Lenders that are members of the Equity Release Council also give consumers the right to choose their own independent solicitor rather than using one linked to the equity release provider. But be aware that this is a specialist area and many high street solicitors won’t have the level of expertise you need. Contact a specialist solicitor, such as one who’s a member of Solicitors for the elderly.
2. The older you are, the more you’re able to borrow. The amount you can release, whether that’s through a lifetime mortgage or home reversion plan, will depend on the value of your property, your health and your age.
SAVVY TIP: Although the amount you can borrow is tiered according to your age, some equity release providers will let you release more cash than others.
3. Ask about the impact on benefits. If you’re entitled to means-tested benefits you may find you’re no longer entitled to them if you receive income or a lump sum payment. However, if you’re aged 75 or over or you receive disability benefits, these shouldn’t be affected.
SAVVY TIP: An equity release lump sum could affect you if you claim Pension Credit.
What to look for
Not all equity release products are the same. Find out how equity release products may differ in my article called 5 things to look for if you’re thinking of taking out an equity release mortgage.
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