Discover equity release and its alternatives
Date: 2024-10-31
AS we approach or enter retirement it’s completely normal to have some questions around how you will fund the years ahead.
Have you thought about what your plans are for your retirement – are you looking to achieve the things you’ve always wanted to do, such as long-haul holidays or buying a campervan, or simply maintain your currently standard of living?
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From there, you can start to consider if your current financial plan can maintain this, or how you could supplement your finances further.
One option to supplement finances that thousands of homeowners choose each year is equity release.
Equity release is a way of unlocking some of the money tied up in the value of your home, so you can enjoy it now.
This could be from a minimum of £10,000 up to 53% of your property value.
What does equity release involve?
There are two main types of equity release plan, a lifetime mortgage and home reversion plan. A lifetime mortgage is secured against your property and any money released, plus accrued interest, is repaid upon death or moving into long-term care.
A home reversion plan involves selling part of your home, which you can continue living in until you die or move into long-term care.
Both types of plans will reduce the value of your estate and impact funding long-term care.
It is a condition of equity release that you must first repay any existing mortgage, but once you have, the tax-free money is yours to enjoy spending. Whether that’s on a holiday, home renovations or supplementing your finances.
One of the benefits of equity release for many people is that there are no regular repayments required, as any money you release, plus accrued interest, is repaid when you pass away or move into long-term care.
Plus, you can choose to take the money as a lump-sum or smaller amounts over time, and plans which meet the standards of the Equity Release Council come with a no negative equity guarantee, meaning your estate will never owe more than your home is worth.
Dangers of equity release
EQUITY release can be a good way to unlock cash in retirement - but there are some dangers to consider, according to The Sun's Money Editor Tara Evans.
Interest rates on lifetime mortgages are around 5.5%, with some topping 8%. This means they can be more expensive than a traditional mortgage and you should always consider downsizing first.
You could end up owing more than you borrowed, although it will never be more than the value of your home.
Using equity release to take cash from your home will reduce the assets you have to pass on to loved ones when you die.
It is a long-term commitment and you may be charged an early redemption fee that can be as high as 25% if you want to pay it off.
Be aware that equity release could affect or stop your benefits.
Always seek advice from a qualified equity release adviser.
Downsizing to raise funds
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As our life changes as we grow older, we may no longer require the same size house as before.
Perhaps children have grown up and moved out, or accessibility needs mean you’d be more comfortable in a smaller single-story home.
Downsizing or moving to a cheaper property can be a strategic move for those looking to enhance their finances in their later years with a lump sum of cash.
By selling a larger family home and purchasing a smaller, more manageable property, retirees can unlock significant home equity, which can then be invested or used to supplement their retirement savings.
Moving to a smaller property could also reduce ongoing expenses such as maintenance and utility bills.
Downsizing can also provide an opportunity to relocate to a more desirable or affordable area, potentially improving quality of life while securing a more comfortable retirement.
However, many people do not want to move from the home they feel settled in and which holds many memories, and the associated emotional and physical upheaval seems daunting.
Renting out a room
If you’ve got a home that’s too big for your needs but you don’t want to move from, you may want to consider renting out a room to raise funds for your retirement.
The Rent a Room scheme is open to owner occupiers or tenants who let out furnished accommodation to a lodger in their main home.
It can be a great way to supplement your income and provide accommodation for lodgers. But the income you get might affect some means-tested benefits.
It allows you to earn up to £7,500 a year tax-free, or £3,750 if you’re letting jointly.
You don’t have to be a homeowner to take advantage of the scheme. If you’re renting you can also let out a room to a lodger, as long as your own lease allows you to do so.
This option may not appeal to some as it requires sharing a living space with someone else, which can be a difficult adjustment if you’ve been used to your current living circumstance for a while.
Get Advice
Speaking to a financial advisor can help you understand the right options for your individual circumstances to help you fund your future.
Age Partnership can help you understand more about your options. It may be that equity release is right for your needs, and if so, advice is required before proceeding.
Through Age Partnership, initial advice is provided for free and without obligation. Only if your case completes would an advice fee of £1,895 be payable. Other lender and solicitor fees may apply.
Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432. Company registered in England and Wales No. 5265969. VAT registration number 162 9355 92. Registered address, 2200 Century Way, Thorpe Park, Leeds, LS15 8ZB.
