June 29, 2020

Should You Use Equity Release to Unlock the Value of Your Home?

Nick Everything Else sponsored post, pensions 4 Comments

Many older people find themselves asset rich but income poor. In other words, they own valuable assets such as their home but live on a modest income.

If that applies to you, equity release is an option you may want to consider, to release some of the cash locked up in your property.

There are two key requirements for doing this. The first is that you must be 55 or over (home reversion plans are only available to over 60s).

The second is that there must be equity available in your home. That means the mortgage must be paid off or the balance outstanding must be significantly lower than the house’s current value. Of course, many older people do find themselves in this situation.

There are two main types of equity release scheme, home reversion plans and lifetime mortgages. I’ll cover each of these in turn.

Home Reversion Plans

With a home reversion plan, a company buys your home but guarantees to let you and your partner (if you have one) go on living there rent-free until you die or go into long-term care.

After this the company normally sells the house and take its profit. Your beneficiaries will not receive any proceeds from the sale or benefit from any rise in the property’s value.

Note that as the company is allowing you to stay in the house until you no longer need it, you won’t receive the full market value of your property. Home reversion plan providers will usually pay you only 30 to 60% of the value of your home. How much you are offered depends on how old you are and how long the company expects you to go on living at the property.

Lifetime Mortgages

Lifetime mortgages are similar to ordinary mortgages except no repayments have to be made until the house is sold.

You receive tax-free cash to do whatever you like with. Eventually of course this will have to be repaid with interest, and the interest rates charged are typically a little higher than standard mortgage rates. However, as you retain ownership of the property until it is sold, this cost may be partly or wholly offset by the property’s rise in value.

There are two types of lifetime mortgage, lump sum and drawdown. A lump sum lifetime mortgage is a loan secured against your home, giving you access to a one-off pot of cash. A drawdown lifetime mortgage lets you draw down cash in stages after an initial lump sum, with interest only payable on the money released. A drawdown lifetime mortgage is therefore likely to work out significantly cheaper overall than a lump sum mortgage.

In either case, how much you can borrow depends on a number of factors, including your age, the value of the property and in some circumstances your health. At 67 you can typically borrow around a quarter of the value of your home, rising to around a third in your mid-70s,

If you have certain medical conditions, you may be able to borrow a higher proportion of your property’s value or obtain a better interest rate via an ‘enhanced’ plan.

Both types of equity release scheme have their attractions, but lifetime mortgages are nowadays by far the more popular option. This is because of their greater flexibility and the fact that you retain ownership of the house and can therefore benefit from any rise in its value.

Negative Equity

With both home reversion plans and lifetime mortgages, you are protected from negative equity (i.e. the risk you or your beneficiaries will end up owing more to the scheme provider than the property is worth). Provided the company is approved by the Equity Release Council (see below), any shortfall at the end will be written off.

Opting for equity release is a major decision, however, and will clearly affect how much money will be left for your children and any other beneficiaries to inherit. It’s important therefore to discuss it with them and get their views; although in the end it is of course your money and your right to do whatever you want with it.

More Points to Consider

Here are a few more things to bear in mind before opting for equity release.

• Consider also downsizing to a smaller property and/or moving to a less expensive part of the country. This can be a cheaper way to release funds from your home if you don’t mind the disruption. But do this sooner rather than later, since people typically become more reluctant to move as they get older.
• As mentioned above, ensure that the company you deal with is a member of the Equity Release Council. Their members must abide by a strict code of practice, and all offer a no-negative-equity guarantee.
• Taking cash using equity release may affect your eligibility for means-tested benefits such as pension credit. This applies especially if you take a large lump sum, as you may then exceed the qualifying limit for benefits such as pension credit and council tax reduction. With a drawdown lifetime mortgage – where you take money in chunks as required – you may be able to remain under the capital limits and therefore qualify (or continue to qualify) for these benefits.
• Leave it for as long as you can. The later you take equity release, the less costly it is likely to prove overall.
• If you don’t have family or others you want to leave your wealth to, cost isn’t such an issue, though. In that case there is much to be said for taking equity release to improve your quality of life and leaving the money be repaid out of your estate when you die.
• If you have bought your house on an interest-only mortgage and don’t have the money to pay it off, equity release can be a good way to repay the loan and reduce your monthly outgoings.
• You don’t have to do it all in one go. Lifetime mortgages in particular are very flexible, and as mentioned with a drawdown plan you can take money in chunks when you need it and interest will only accrue on what you have withdrawn so far.

Key Equity Release

While equity release can be a great way to free up cash to help you enjoy later life, taking it is a major decision with many potential ramifications. It’s therefore very important (and indeed a regulatory requirement) to get independent professional advice before proceeding.

Key Equity Release [affiliate link] are leading equity release specialists who work with a wide range of financial service providers and provide no-obligation advice on the best options in your case.

Key Equity Release only arrange lifetime mortgages, but (as mentioned above) these are now by far the most popular option for equity release, with many advantages due to their flexibility and the fact you retain ownership of your home.

• You can check how much you might be able to raise through equity release using the calculator on the Key website.

All advice from Key is free of charge, and due to the pandemic is now available in full over the phone. Key’s independent adviser will discuss your options with you, including checking that you are receiving all the state benefits you may be entitled to. They will recommend based on your needs and circumstances. For example, if you want to ensure some money remains for your descendants, however long you remain in your home, they have plans to cater for that. Equally, if your priority is getting the lowest interest rate or withdrawing the largest possible amount, they can arrange this too.

Key say that they have been able to access interest rates from as low as 2.45%, and most of their customers have received a fixed annual interest rate of 3.97% or lower.

• The company also has mainly five-star reviews on Trust Pilot (average 4.9), which you can check out via this link. This is one of the highest average feedback scores I have seen on Trust Pilot.

Closing Thoughts

If you are looking for a way to release money from your property, whether to fund specific purchases or just to make later life more comfortable, equity release is definitely worth considering. The main downside is – of course – that ultimately there will be less money to pass on to your descendants. All reputable providers, however, offer a No Negative Equity Guarantee, and some such as Key Equity Release can arrange plans where a certain amount of cash is guaranteed to remain in your estate.

Equity release interest rates are at historically low levels, and in most cases are fixed for life. If equity release is right for you – and you will need to discuss this fully with an independent adviser before proceeding – now could be the ideal time to set the ball rolling. So why not get in touch with Key Equity Release today for a no-obligation discussion?

If you have any comments or queries about this article, as always, please do post them below.

Disclosure: This is a sponsored post. If you click through a link in it and arrange an equity release plan with the company in question, I may receive a commission for introducing you. This will not affect the service you receive or the terms you are offered. Please note also that I am not a registered financial adviser and nothing in this post should be construed as individual financial advice.