The increasing popularity of equity release as part of the retirement planning mix was demonstrated in 2017, which saw new records set in the equity release market.
Data from the industry’s trade body, the Equity Release Council, shows that £3.06bn was withdrawn by 67,000 homeowners in 2017, up from £2.15bn in 2016 and £1.6bn in 2015.
Equity release was traditionally considered to be an option of last resort, but factors such as booming house prices, falling mortgage interest rates and the threat of inheritance tax, have increased the appeal of such schemes to many wealthy homeowners. For many, their property is their largest asset and so it has the potential to play an important future role in helping to meet the challenge of ensuring effective later life funding.
Equity release is a general term for a range of products that allow you to access the equity in your home after you are 55. You can take the money released either as a lump sum or in smaller amounts as required. In most cases, the interest is rolled up and the loan and accrued interest are paid off when the property is sold, or when you move into long-term care or on death.
Research shows that most people opt for a "drawdown" plan while one in four take a single lump sum. Across all customers, the average sum released is around £70,000.
Common uses include paying off interest-only mortgages, clearing other high-interest debt such as credit cards, or funding home renovations.
There are basically two equity release options – a lifetime mortgage or a home reversion scheme. With a lifetime mortgage, you take out a mortgage on your property but keep ownership. If you wish, you can choose to ring-fence some of the value of your property as an inheritance for your family. You also have the choice as to whether you make repayments or let the interest roll-up.
With home reversion schemes, you can choose either to sell part or all of your home to a home reversion provider. In return you get a lump sum or receive regular payments. You can then continue to live in the property until you die, rent free, subject to maintaining and insuring it. As with the lifetime mortgage option, you can ring-fence a percentage of your property for inheritance purposes or other use. At the end of the scheme, when the property is sold, the sale proceeds are shared based on the remaining ownership proportions.
Whilst equity release might seem like a good option if you want some extra money and don’t want to move house, there are several caveats that you need to bear in mind.
For starters, equity release can be more expensive in comparison to an ordinary mortgage and your debt can grow quickly if the interest is rolled up. For lifetime mortgages, there is also no fixed “term” or date by which you’re expected to repay your loan. With home reversion plans, you will usually not be given anything near to the true market value of your home when compared to selling your property on the open market.
Further, if you release equity from your home, you might not be able to rely on your property for money you need later in your retirement - for instance, if you need to pay for long-term care. And obviously, if you take out an interest roll-up plan, there will be less for you to pass onto your family as an inheritance, which could be an issue.
So whilst equity release is an option worth exploring it will not be for everyone. However, for homeowners who think holistically and consider their property alongside their other assets, equity release can help many live the retirement they want.
This summary just scratches the surface of this complex issue and is not advice. To find out more about equity release and for professional financial advice, contact Kellands today.