There’s a financial product that allows you to access some of the money tied up in the value of your home.
It’s called equity release and it’s generally available to homeowners over the age of 55.
You’re more likely to be eligible if you have no current mortgage or if any mortgage you have is relatively small.
Many customers use the money to pay for home and/ or garden improvements, clear existing mortgages or credit card debts, or get help for their regular bills. Others take the cash to spend on a much-deserved dream holiday or to give as a gift to family or friends.
Home reversion plan
There are two types of equity release options. You can opt for a home reversion plan where you sell all or part of your property to a home reversion provider in exchange for a tax-free lump sum with no interest payments. You can stay in your property for the rest of your life while the provider will take its share of the proceeds when the plan comes to an end.
Lifetime mortgage
The second and most popular option is a lifetime mortgage. It involves taking out a loan secured against your property while retaining 100% ownership of your home. It runs for your lifetime until you either die or go into a care home. The property is then sold and the loan repaid.
“You do not need to make monthly repayments as you can allow the interest to roll up. However, if you do wish to make payments to control the level of debts, some providers will allow you to make the interest payments or overpayments of typically up to 10% per annum,” according to Amanda Law, mortgage and protection adviser at Aberdein Considine.
Amanda adds, “You don’t have to take the full lump sum at the start. You can take a partial lump sum and then have the remaining amount in a reserve facility. You can then draw this down when you choose – meaning you don’t pay interest on the amount in the reserve facility until you draw it down.”
Downsides to equity release
While equity release is proving to be a popular way for the elderly to give their retirement finances a boost, it’s not right for everyone.
Amanda warns of some pitfalls tied with this financial product:
- Taking a lump sum can impact any means tested benefits someone receives.
- There are early repayment penalties if you’re in a position to repay the loan early.
- Interest can roll up quite rapidly if unmanaged and you are at risk of owing a lot more than was originally borrowed.
- Family inheritance will be reduced so it’s important to discuss any plans with your family beforehand.
Alternatives to equity release
If equity release is not for you, you may also consider remortgaging to raise some extra cash.
Or you can downsize and move to a smaller property or retirement village.
Aside from freeing up your finances, you may be able to avail of some special incentives from property developers. You’ll also have a household that’s cheaper to run and easier to manage. Whether you choose equity release or any of its alternatives, you have to consider your options very carefully. It’s best to start by seeking professional advice from a qualified adviser.
Amanda says, “It is their job to understand your situation and point out the potential alternatives that may be better suited to you. Whatever your choice there are options that will help you enjoy your retirement.”
