Homeowners and retirees looking to boost their incomes are increasingly using equity release products.
Giving homeowners a way to access the wealth tied up in their property, equity release can be an attractive option. It can give you a lump sum or pay over several smaller amounts. There are two main equity release options:
1. Lifetime mortgage: This is where you’d take a mortgage out on your home but retain ownership. You can choose to make repayments on the loan if you have enough income. Alternatively, you can allow the interest to accumulate. The loan amount, plus any interest incurred, will be paid when you die or move into long-term care.
2. Home reversion: This is where you sell a portion of your home and receive money in return. You have the right to continue living in the property until you die. The portion of the home you own will remain the same, even if the property’s value increases or decreases.
Equity release is proving a popular option during retirement. In fact, £11 million of property wealth is withdrawn every day to support later life finances, according to the Equity Release Council (ERC). The number of equity release products sold has grown by almost a quarter in the last year alone.
While equity release can give your finances a significant boost in retirement, there are drawbacks to consider before you start searching for a product. Some of the disadvantages of using an equity release product to weigh up are:
Depending on the type of equity release product you choose, the interest that is accumulating can increase quickly. This is a particular concern if you choose a Lifetime Mortgage and are not making any repayments on the loan.
The compounding effect means that what starts off as a reasonable amount of interest can rise very quickly. It may significantly affect the inheritance you leave loved ones or outgoings if you begin making repayments.
If you currently meet the criteria for means-tested benefits, be aware that taking a lump sum out of your home could affect your eligibility. This isn’t always the case but, in some circumstances, capital that you hold will impact on the support you receive from the government.
If you’ve been planning your finances to leave an inheritance to your loved ones, your home has probably made up a big part of that. Using equity release will impact what you can leave behind. With both types of equity release products, there are options to ringfence a portion of your home’s value to ensure that it’s passed on. However, this will affect the amount you can access.
Once you’ve released equity from your property, there’s no going back. It’s a final decision that means you’ll be unlikely to access wealth from your home again, even if property prices rise. It may also restrict future opportunities, such as moving home. As a result, it’s important to weigh up the pros and cons before you go ahead.
If equity release isn’t the right option for you, there are alternatives for you to consider.
Before you move forward with any decision, it’s important to understand what all your options are and where your finances stand. Financial planning can help you make the right decision with your goals and assets in mind, you may be surprised at the alternatives to equity release. Please contact us to discuss the ways you could fund your retirement plans.