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Many people have heard of equity release but don’t quite understand exactly what it is, or how it works. In some cases, we at Suttons IFA have come across people who have undergone the process of equity release without taking financial advice. This can result in misunderstandings about the paperwork or neglecting the implications of equity release for an individual’s wider financial plan, which can create a lot of stress later.
Our intention with this short guide is to help prevent that from happening to you. Here, you will find some useful information about the different types of equity release, when it can be a good idea and some risks to be aware of.
Please consult your financial adviser before making any big financial decisions about your home. If you would like to arrange a free, no-commitment consultation with a member of our financial advice team here at Suttons IFA, then get in touch via:
T: 0161 969 1703
E: [email protected]
What is Equity Release?
Put simply, equity release refers to a range of financial products which allow you to release the money tied up in the value of your home. It can often be an attractive option for older people approaching retirement who own (at least some of) their property, yet do not have many liquid assets or savings to fund their retirement. Many people are also drawn to the idea because it opens up funds from your home without requiring you to move house.
When you engage in equity release, your remaining mortgage needs to be cleared. This can often be achieved using the value of your property. There are two main approaches to equity release to consider:
- Lifetime mortgage. This is probably the most popular option. Here, you borrow money which is secured against your house. The mortgage will eventually be fully paid when you sell your home upon death, or when you enter into residential care indefinitely.
- Home reversion plan. Under this option, you sell some (or all) of your home in exchange for a lump sum or regular payments. You can keep living in the property until your death or until you move permanently into care.
Who is Eligible for Equity Release?
Equity release isn’t an option that is open to everybody. In particular:
- In 2019-20 you must be at least 55 years old for a lifetime mortgage or at least 60 years old for home reversion.
- The property in question must be your main residence and owned by you. Usually, lenders will require that your property is valued at least a certain price, and must be in good condition. Some lenders will exclude certain property types.
- If you live with dependent then equity release can be much more complicated. In the event that you die, they might be required to sign a form accepting that they might be required to move out of the property.
The Risks of Equity Release
As alluded to already, equity release does come with significant financial planning implications which you should weigh up carefully with your financial adviser. In particular:
- Equity release might require dependents to move out of your property when you die (as mentioned above).
- If you take out an equity release agreement on your own and later marry, then it is not certain that you will be able to amend the policy to include both of your names. If you die or enter permanent care, then they might need to pay off the equity release agreement. This could result in them needing to sell your home.
- When you enter an equity release agreement it can affect your benefits. Some of your means-tested benefits might be lowered, or completely taken away.
- Relying on equity release can restrict your financial options later, if you end up needing to enter care. For instance, you will likely be unable to sell your home to help pay for your care fees.
- Equity release agreements can be very difficult to get out of or alter, if you later want to change your mind.
Reasons to Consider Equity Release
Of course, equity release does come with some important advantages which for many people outweigh the downsides, once they have considered everything carefully with a financial adviser. As mentioned above, it can allow you to access much-needed money for your retirement income, whilst allowing you to keep living in your home. Releasing funds like this can also help “property-rich-cash-poor” clients access the money they would like to give to their children, to help them onto the property ladder.
Equity release can also help people to clear some of their other pressing debts as they enter retirement, such as loans and credit cards. In certain cases, equity release can also open up opportunities to make some much-needed home or garden improvements, such as a stair-lift for an ageing couple with reduced mobility.
If you would like to know more about equity release or to discuss your own mortgage plans with us, then we’d be delighted to hear from you.
Please get in touch using the details below, to arrange a free, no-commitment financial consultation with a member of our team:
T: 0161 969 1703
E: [email protected]