Education
With half the nation worried about a lack of money in retirement, we consider whether equity release presents a viable option. With almost half of those set to retire this year worried they’ll run out of money in retirement, it’s no wonder people are looking for more ways to increase their income – and sooner rather than later. It’s a genuine concern. It’s predicted that one in 10 men and one in six women in the UK will be living on less than the recommended minimum income when they retire. Despite these troubling statistics, it’s thought that the over 50s are sitting on an enormous £2.8 trillion worth of property in the UK. With this in mind, it’s unsurprising that so many retirees want to unlock some of the cash in their family home to make up for their shortfalls. Equity release is a popular route, though it’s not right for everyone and there are significant risks involved. Equity release schemes have a chequered past and still struggle with their reputation. However modern schemes which follow the guidelines of the Equity Release Council have considerable protections including ‘no negative equity’ guarantees. So What is equity release, and how does it work? If you’re over 55, there are a range of products available for you to release money tied up in your home. The two most common are lifetime mortgages and home reversion plans. 1. Lifetime mortgage The most common option, and essentially where you borrow a percentage of your property’s value. There will be interest on this loan, but instead of having to pay it each month, it’s usually rolled up (added back on to the amount you have borrowed), and then paid off when the property’s sold. This means that the amount you owe would increase every month. 2. Home reversion plan This is where you sell off a chunk of your home to a home reversion company but continue to live there. This can be expensive, because you’ll only usually get a fraction of the value of the chunk you’re selling, and when the property is sold, the home reversion company takes a percentage of the sale. If, for example, your house was worth £200,000, and you sold half of it, you might get just £50,000. If the property value then rose to £250,000 when you came to sell it, the home reversion company would take £125,000. When you could consider equity release 1. If you don’t want to downsize If you can’t bring yourself to downsize, or you’re unwilling to sever the emotional ties with the family home, these schemes could help you free up some cash. 2. There could be tax benefits When your inheritance tax bill is eventually calculated, the mortgage and any interest is subtracted from the value of your property. If you’ve spent the equity or given it away at least seven years before you die, it won’t be counted. So there may be less tax to pay. But remember that tax rules can change and the benefits will depend on your individual circumstances. Where equity release isn’t the right decision In the right circumstances, equity release can work. But for most people, the additional costs outweigh the benefits of your other options, such as downsizing. 1. Interest on interest The interest being added to a lifetime mortgage can have a big effect on the sum you owe to the equity release company. Even at an interest rate of 3.5%, over 20 years, your debt will double. This might not be a problem if the value of your house rises faster than the rate your equity release mortgage increases by, but there are never any guarantees. These costs will impact the value of the inheritance you leave to your loved ones, so talk to those affected