More and more homeowners are choosing to release equity and take money from their biggest asset to boost their income in retirement. Whether this means generating cash for home improvements, a holiday or releasing funds to help grandchildren with university, lifetime mortgages are becoming a popular choice in later life.
Equity release has evolved considerably over the years, today the market is fully regulated and supervised by the Financial Conduct Authority (FCA) and there is a significant level of consumer protection in place. But while many people are benefitting from the advantages of equity release, there are still many misconceptions which may prevent some over 55s from considering it.
Here, we debunk some of the equity release myths and explain the role lifetime mortgages, the most popular form of equity release, can play in boosting your finances.
Assuming you take out an equity release plan with a provider approved by the Equity Release Council, you will never owe more than the value of your property when it is sold. The Equity Release Council is a trade body which exists to promote high standards of conduct and practice in the provision of advice concerning equity release. They stipulate that products must have a “no negative equity guarantee”, which means when your property is sold and all the fees have been paid, even if the amount left is not enough to repay the amount owed to your provider, neither you nor your family will be liable to pay any more. All the lifetime mortgages we recommend come with a no negative equity guarantee.
While equity release will reduce the value of your estate, it doesn’t necessarily mean your children will have nothing to inherit. The money from the sale of your home will be used to pay off your lifetime mortgage and anything left over will go to your estate. Some providers offer the option of an inheritance protection guarantee which allows you to ring-fence a percentage of your home’s value, so that it can be passed on to your chosen beneficiaries.
You can also maximise the money left for your loved ones through a ‘drawdown’ plan. This gives you the option to borrow an initial lump sum while providing a cash facility which you can tap into when you need it. As you only pay interest on the amount borrowed, a drawdown plan could be a way of reducing the final amount of interest to be repaid, potentially leaving a larger inheritance for your beneficiaries.
Alternatively, you could decide to make regular monthly or adhoc repayments which can minimise the final amount of interest to be repaid.
Having a mortgage doesn’t prevent you from releasing equity, in fact many people use equity release to clear an outstanding mortgage. For some homeowners who have retired or are approaching retirement, a mortgage can be a financial burden which they are unable to bear on a reduced retirement income. A lifetime mortgage allows homeowners to release tax free cash from their property with no need to make monthly payments unless they want to. This money can be used to spend as they desire, even to clear a mortgage.
With a lifetime mortgage you are not selling your home to the lender, instead you are borrowing against the value of it, and you will remain the owner. Unlike standard mortgages, a lifetime mortgage has no predefined end date, so the mortgage lasts for as long as you need it. You continue to live in and keep ownership of your home and will continue to benefit from any rise in its value. If you’ve taken out an equity release plan in joint names, the plan will continue for as long as one of you remains in your home. Because you remain as the owner, it may be possible to move to an alternative property in the future as equity release can be transferable.
Lifetime mortgages can provide money for your retirement without the need to make regular repayments, unless of course you decide to make them. Instead the loan is repaid either by your estate when you die or if you go into long term care with anything left over going to your beneficiaries.
Releasing the equity in your home is a big decision, so it’s important to consider all of your options and weigh up the pros and cons. A lifetime mortgage will reduce the value of your estate, it could change your tax status and may affect your entitlement to benefits plus there will be fees to pay if you proceed. Seek professional advice to get a full understanding of what’s involved and to find out whether it's right for you.
We provide impartial equity release advice to clients based in Torbay, South Devon and Exeter. To find out more about releasing equity from your home, please contact us for a free initial consultation.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.