What is Equity Release?

How will you pay for retirement? Pensions, savings and decumulating investments are probably at the top of your list. However, retirees are tapping into the wealth locked in their property more than ever through Equity Release products.

With the value of properties rising rapidly over the last couple of decades, it’s not surprising that homes are increasingly becoming part of retirement plans. The average property price in the UK is now over £230,000 and has the potential to deliver a significant boost to retirement income. Whilst downsizing to release some of the equity held in a property is still a popular option, Equity Release provides an alternative solution.

According to the Equity Release Council:

68% of homeowners see property as an important factor in their financial comfort in later life
Over half (51%) of homeowners factor property into their financial plans
40p in every £1 is property wealth in over-65 households
44% feel taking out a mortgage or loan to access wealth in later life is becoming a more common way to manage money

There’s a range of ways retirees are using property wealth to fund their lifestyle. Research from Canada Life indicates it’s increasingly being used to fund day-to-day costs rather than one-off purchases. One in five Equity Release customers use the money to fund everyday expenses, a 5% increase in the last two years.

Alice Watson, Head of Marketing and Communications at Canada Life Home Finance, said: “The growth in customers using Lifetime Mortgage as income during their retirement reflects the extent to which Equity Release is now viewed as a practical option for retirement planning. Alongside more traditional sources of income, such as pensions and other savings or investments, the use of property wealth is helping to boost the quality of retirement for an increasing number of people.”

Equity Release: The basics

When you want to access money locked in your home, Equity Release can seem like an attractive option but it’s important to understand exactly what it means. Equity Release is the term used for a range of products that release money tied up in your home, the most common type is a Lifetime Mortgage.

A Lifetime Mortgage is essentially a mortgage that isn’t paid off until you die or move into long-term care. There are several key factors to consider with a Lifetime Mortgage, which can vary between products:

A Lifetime Mortgage can either pay a single lump sum or offer multiple payments and drawdown options.
Interest will be added. In the past, this would have been rolled up and payable when you passed away. However, as the market has grown the range of products available has expanded too. There are now some options that will allow you to make repayments, reducing the overall cost and preserving the inheritance you leave behind.
Typically, Lifetime Mortgage will have a no negative equity guarantee, meaning your estate can’t owe more than the total value of your home. Though this isn’t the case with all products, you should always check before proceeding.
In some cases, it’s possible to ring-fence a portion of your property value, preserving wealth to pass on to the next generation.
Reversing an Equity Release decision can be difficult and likely to be costly.

If you’re interested in Equity Release products, it’s important to explore other options too. A Home Reversion plan, for example, will purchase a portion of your property and allow you to live there, rent-free, until you die. When the property is sold, the proceeds are split based on the percentage the lender owns. If the value of the property rises, so does the amount payable to the lender.

The pros and cons of Equity Release

Pros	Cons
You can access money tied up in your property without needing to sell.	Once Equity Release has been used, the property can’t be used as security for any other loans.
In most cases, you won’t have to make monthly repayments unless you choose to do so.	As you’re unlikely to be reducing the debt or paying interest, the debt can rise quickly.
A no negative equity guarantee means a lender can’t claim more than the total value of the property	Your loved ones will receive a smaller inheritance as the original loan and interest will need to be paid.
Releasing wealth from property now can help reduce an eventual Inheritance Tax bill.	Early repayment penalties can be significant.

Remember, Equity Release isn’t your only option. Downsizing, using other assets or seeking support from family should all be considered before proceeding. We can help you understand how your assets can be used to deliver the retirement you’re hoping for, please get in touch if you want to see if Equity Release could be an option for you.