What you need to know about equity release for retirement income
As life expectancy increases retirees may need a bigger pension pot to ensure they have enough to live on. However, many people's funds continue to be insufficient for providing a comfortable retirement. This is one of the reasons why people choose to release equity from their home.
According to the Equity Release Council, the most popular reason for releasing equity from a home is for extra retirement income to meet everyday costs. When reaching retirement some people find themselves asset-rich but income-poor and, as a result, the number of people using their property wealth as a source of income in later life is increasing, with customer numbers rising 12% from July to December 2014.
What you need to know
- You must be aged 55 or over to release equity from your home
- Your home must be well-kept as the loan will be repaid from the value of the property
- If you have an outstanding mortgage you can still apply, however the amount of cash you can release is likely to be less than if you have already paid off your mortgage
- You can take the cash you release as a lump sum, or as smaller amounts over a period of time
- There are two main product types available: lifetime mortgages and home reversion
With a lifetime mortgage you borrow a percentage of the value of the property in exchange for a lump sum or regular income. Compound interest is charged on the amount you borrow, typically at a rate of 6% or 7%. The loan amount, along with the interest, is taken from the value of the property when it is sold. According to the Equity Release Council’s Spring 2015 report, lifetime mortgages that provide a regular income, known as drawdown lifetime mortgages, are the most popular product type and provide you with an ongoing income.
With home reversion you effectively sell a share of your property in exchange for a lump sum or regular income. You can continue living in your home but must ensure that it is well maintained. When you die the property is sold and the home reversion provider retrieves the same share of the property that they bought.
Pros of equity release
- Equity release can help you to be more financially comfortable during retirement
- You do not pay anything back until you die or sell your home
- Some providers assume the risk and promise no negative equity, so you will still have something to give to beneficiaries
Cons of equity release
- The interest rates of a lifetime mortgage could see your loan double over 11 years, so the value of your assets could significantly decrease
- Home reversion plans pay you a lot less than the market value of your property
- You may want to downsize but might not have enough equity left to move
- The money you receive from equity release is treated as income, so could affect how much income tax you pay
- If leaving your assets to beneficiaries, they could inherit a lot less than you had anticipated
You shouldn’t plan to rely on equity release as a source of income in retirement as there are risks involved that could leave you worse off. It is far more practical to plan ahead and save into a pension fund over a long period of time. There are alternatives to equity release, for example you could downsize or move to a cheaper property to free up some of the cash you have in your home. Equity release is not suitable for everyone so you should talk to a regulated financial adviser before making any significant financial decisions.
Have you released equity from your home or are you planning to? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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