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Equity Release - Is it right for you?

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Equity release had some bad press a few years ago because it was not regulated and because the terms were often unfair but I am pleased to say that there is much more stringent and fair regulation in this area and a wide range of products are now available that offer more flexible options.
It is not the right option for everybody but if used in the right way it can be a good solution for some people. I aim to describe what equity release is, who it is for and why it might be used below.

 What is Equity Release?
In very simple terms equity release is where you unlock some of the equity within your property and convert it into cash. There are two methods of equity release; the first is a lifetime mortgage whereby you still maintain ownership of your property and the second and much less common is a Home Reversion Plan whereby you sell some or all of your property in exchange for a cash lump sum. In both cases, you can live in your home until you die or go into long-term care. If there are joint borrowers, then this would be until the second borrower died or went into a nursing home for long-term care. At which point the house is sold and loan repaid. For lifetime mortgages the interest is ‘rolled up’ so that you do not pay any monthly payments, interest is added to the loan instead, and the final debt is due on death. There are however products which offer the option to make monthly or annual interest payments for the original loan amount to stay the same. 

Who is it for?
Equity release is for homeowners, and the minimum age is usually 55 years old for the youngest borrower, and some providers have a minimum age of 60 years. It would typically be older for Home Reversion at 65 years. The older you are, the higher the proportion of your property value you can borrow.

Why might it be used?
Equity release is designed to free up some of the capital in your home. Many retired people have more money in their home than in their pension, and a third are reliant upon state pension to provide income.

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Equity in your home could be viewed as being a part of your life savings but if you are unable to use these life savings for yourself that might mean that your lifestyle is unnecessarily reduced.

Many older people are servicing interest-only mortgages or have debt that needs to be repaid to the lender and are therefore under financial pressure.
Some of the reasons why some people may want to release equity from their home are as follows:
  1. Debt repayment
  2. Low income – need help with daily living
  3. Newly retired and want to maintain current lifestyle
  4. No dependants
  5. Home improvements
  6. Long-term care – not entitled to state help
  7. Holiday
  8. A gift to the family – e.g. house deposit
  9. Estate Planning – reduce the potential for an Inheritance Tax Bill (Applies to estates > £900,000)
There are many other reasons why equity release may be used.

Example 1
Alan and Mary aged 67 and 80 own their own home with no mortgage. They estimate that the home is worth £250,000. They have a daughter who is not financially dependent on them, and they are not concerned with leaving anything in inheritance for her. They both have pension income from their previous jobs in the forces and as a teacher and are also in receipt of the state pension. They do not save on a monthly basis as they enjoy their lifestyle. They want to buy a motorhome for £50,000 and go around Europe in it as this has always been their dream. They have no savings in place, and their only asset is their home. Equity release is a good option in this case, and although they could afford to pay the monthly interest, they have opted not to pay the interest as they want to maintain their current lifestyle.

Example 2
Joyce is 83 years old and lives in a large house. She doesn’t want to move as she is very settled there. It is worth approximately £300,000. She has no savings and has a credit card with a balance of £15,000. She receives a widows pension as well as state pension and enjoys a comfortable level of income. She would like to go on a round the world cruise, repay her credit card and do some home improvements. Equity release is a good option for Joyce as she will get to maintain her lifestyle and has the option of paying the interest if she wishes. 

Example 3
Carol and Michael have their own property. It has grown substantially in value over the years and is now worth over £1,000,000. They have a good pension income and are comfortable with this but would like to help their son get onto the property ladder. They have no savings in place, and the only assets they have are within their home. They do not want to move house, and so equity release is a good option for them. They want to release £100,000. They do not want the interest to roll up as they want to preserve as much of their estate as possible, so they are choosing to pay the monthly payments.

Considerations
Before selecting equity release as an option, an adviser will typically speak to you about other alternatives to generate the income/capital you require. Alternative options may include:
  • Could you move to a smaller / less expensive property?
  • Could you sell your property and rent somewhere?
  • Could you take in a lodger?
  • Do you have any other assets that you could use?
  • Could you look at re-budgeting?
  • Are there any state benefits that you might be entitled to?
  • Could your family help to support you?
Other Considerations
State benefits – your entitlement to some state benefits (not the state pension) may stop if you release equity from your home
Interest roll up – if you do not pay the interest then it will roll up, and typically the amount you owe will double over a ten year period.
Home Reversion / Lifetime Mortgage – Ensure you choose the right option for you
Early Repayment Penalties – Some products have fixed early repayment penalties, and others are linked to Gilt rates which can potentially be very high – ensure you understand these before going ahead. Equity release is a specialist area of advice, and I would strongly recommend taking advice from an independent financial adviser before progressing.

There are so many different products, and it is important that the product suits your needs. At Veracity Financial Planning we advise on Equity Release and can see you at home or in our offices in Nottingham.

Please contact us by calling 0115 967 0888 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it.
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