If you’re looking to get your hands on cash to fund your lifestyle after 55, equity release can be one of the options you may want to consider. Like all finance products, equity release comes with its positives and negatives – and that’s exactly what we’ll discuss in this handy, simple guide to understanding equity release, along with useful tips from our experts.
Planning for your retirement can be a seriously daunting task – so much so that a significant share of Britons never gets around to doing it. But that’s not it. More often than not, your savings, investments and retirement funds, even when put together, may just fall short being enough to fund your lifestyle.
On average, UK seniors need £27,000 or more to lead a comfortable lifestyle. Given the ever-increasing costs of healthcare and leisure, it’s safe to assume that this number will go up faster than most retirees and seniors can catch up with. This – despite the fact that many seniors strive to save a good deal of money each year – is a sign of worry. In fact, in April 2019, the UK households, companies and the government all went in deficit together – something that’s never happened before.
If you find yourself in a situation where you need more cash to meet the monthly requirements, the obvious choice will be to downsize. If you don’t want to downsize, equity release can be a viable alternative – provided that you know what it is, how it works and what the potential downsides of getting into such a contract can be.
What Is Equity Release?
Equity release is a way of freeing up the value of your home without having to move. By and large, it’s a fairly simple concept – you give up partial/full equity and you get cash in return as a lumpsum or in monthly instalments.
Equity release allows you to forgo the inconvenience/inability to move. But keep in mind: you’ll need to understand the finer details.
Equity Release: Key Points
- The cash you’ll get upon releasing the equity will be tax free. You’ll be free to utilise it as you want to.
- Equity release options are available to homeowners who are 55 years of age, or older. Home reversion plans are available to seniors who are 65 years of age or older.
Our equity release mortgage brokerage guide discusses these points – along with various types of equity release – in greater details.
Let’s now move on to discussing a few important equity release tips from our in-house experts, lenders and industry specialists.
1. Weigh Other Options First
Equity release, at the end of the day, is a mortgage you raise by keeping as security your share in your home. So, as is the case with all other mortgages, it’s advisable that you are aware of your other options.
The most obvious one would be downsizing. If you’re in good health and have no trouble making the move, downsizing can save you a great deal of money. It can not only unlock the full market value of your home, but it’ll also allow you to cut down on future maintenance expenses and higher property taxes. If not, you can think about renting a portion of your house or converting it into an HMO (this will, of course, need investment). If you want to learn more about how HMOs work, do go through our HMO finance explainer.
In addition, you should explore options like utilising your savings and investments, if that makes financial sense in the longer run.
2. Understand And Be Aware Of Your Monthly Expenses
Later life care is a sensitive issue, and yet very few people try to address it head-on. The first rule of successful money management is to be aware of your expenses. So, before you decide that equity release is the way you want to go, you need to be very sure of how much is needed to fund your lifestyle including leisure and luxury.
Some important aspects are non-negotiable. For example, if you need to plan for home care, you need to take into account the fact that home care professionals can charge you up to £30 per hour. In addition, if you wish to fulfil your travel/vacation goals, you’ll want to have at your disposal upwards of £5,000 in free cash each year.
This is just to show that when you calculate all your expenses correctly – with enough leeway for miscellaneous and incidental outgoings – you will be in a better position to decide whether you need to release equity at all (and how much, if you need to).
Important – Equity Release May Affect Certain Benefits
Since equity release concerns homeowners aged 55 or more, it’s important to consider its impact on some of the benefits you may be receiving.
Going ahead with equity release means that there is a significant change in your affordability. With free cash lying in your bank (or a monthly stream of income guaranteed over a period of time), your finances assume a whole new shape. What this means is that there is a possibility of this having a direct impact on means-tested benefits you are presently entitled to receiving.
Understanding What Means-Tested Benefits Are
Means-tested benefits, in the simplest of terms, are the benefits you receive as a result of being in a certain financial position of advantage/disadvantage.
For example, couples whose weekly income is lower than the present benchmark of £255.25 may receive Pension Credit (a means-tested benefit).
Which Benefits Does Equity Release Impact?
In most cases, we’ve observed that equity release impacts Pension Credit and Council Tax Reduction.
As we stated in the earlier point, if releasing equity moves your weekly income above the benchmark, your Pension Credit benefit may get affected. Similarly, Council Tax Reduction presently allows pensioners with capital smaller than £16,000 certain tax concessions. These may no longer be applicable if releasing equity takes your capital over £16,000.
Calculate The Cost Of Your Equity Release Mortgage Beforehand
We mentioned earlier that every qualified broker will provide you with a detailed breakdown of their fees and commissions. These will be the upfront and one-off costs of releasing your equity. The long-term costs will, however, be determined by the type of equity release you choose and the interest rate on offer.
Typically, equity release mortgages are more expensive than regular mortgages. For example, our lenders can offer you equity release quotes with interests rates up to or lower than 5% (a representative number).
Let’s assume that you’re 60, your property is worth £150,000 and you want to release a third of your equity to convert it into a lifetime mortgage worth £50,000 (the one that will last your lifetime).
Assuming that the lender charges you interest at 5% per year, here’s what the breakdown of costs will look like over the next 15 years.
As you can notice, in this case, the principal doubles roughly every 14 years. That, indeed, is a steep climb when compared to regular mortgages. This aspect of equity release should be given due attention when you’re applying for equity release offers.
Additional Costs You Should Expect
Keeping aside the brokerage and commission, you will need to arrange for additional arrangement costs.
These usually vary from one case to another, and the typical ones include solicitor fees, valuation fees, administration charges – not to mention the stamp duty on the agreement. Many lenders offer to pay for these costs by making necessary deductions from your mortgage principal.
How Much Should You Borrow?
This, of course, is your call. Lenders on our panel offer both lifetime mortgage and home reversion plans that can be customised to fit your requirements. That, however, really isn’t the issue here.
It’s essential to understand here that – thanks to relatively higher interest rates – equity release mortgages become more expensive over time. The longer you borrow for, the more you’ll pay – it’s as simple as that.
Hence, it’s advisable that you borrow only the amount that you really need and think is adequate to see you through. If you can compartmentalise your requirements, you’ll know what the pressing needs are.
You can always release more equity at a later date or consider structuring a drawdown lifetime mortgage plan that allows you to draw cash from your equity as and when you need to.
A Lump Sum Or Monthly Income?
This is another important consideration.
Most lenders are happy to let you decide the mode. A lump sum allows you to take care of major expenses right away (think medical/care bills, other unpaid bills, outstanding loan/mortgage payments, gifting money to your loved ones or buying a new car). You can also choose to use this cash to finance your vacations and other leisure activities.
On the other hand, monthly income makes sure that you’ll have a reliable, guaranteed stream of income to take care of your regular expenses each month.
At the end of the day, it all boils down to what your requirements are and how you want to go about spending your money.
Can You Make Monthly Repayments?
An average equity release case will go through the borrower’s lifetime without any monthly repayment being made. This is the most convenient and common mode of operation for equity release products.
However, some lenders may allow you to make monthly repayments towards the interest. This means that you keep the mortgage active by repaying the monthly interest and making sure that – in the long run – the mortgage turns out to be much cheaper.
This is better explained with an example. We’ll carry forward the same numbers from our previous example.
We saw that over ten years, including the compounded interest, the mortgage value will swell to £81,444 from £50,000. In other words, the cost of mortgage will turn out to be £31,444 over ten years.
If you, however, were to pay the interest off each month, the same cost will come down to £25,000.
Will You Be Able To Leave An Inheritance?
It’s a question that’s very important to many borrowers. If you want to pass your assets on to your loved ones, you’ll need to understand that releasing equity means that there’ll be lesser value for them to inherit.
If you want to make sure that you leave a certain amount as inheritance, you can make necessary arrangements by adding an inheritance protection clause to your equity release plan. This may, however, bring down the mortgage principal.
Can You Transfer The Equity Release Plan?
Despite releasing equity, many borrowers feel the need to downsize anyway. Such a scenario warrants an important question – can you transfer an equity release agreement from one property to another?
The answer depends entirely on the lender’s policies and the terms of agreement. It’s best to have this aspect settled while drawing up the equity release plan.
Assess The Property Market
Since every equity release plan is essentially tied to the market value of your home, the overall property market plays an important role in how much you’ll have to pay back.
If the market value of your property goes down, you’ll owe much more to the lender. This, however, only applies for lifetimes equity release mortgages. Home reversion plans make your position more or less immune from market ups and downs.
With Caution And Care, You Can Make Equity Release Work!
Releasing equity is an important decision and should be taken with due deliberation and care. You may contact the Equity Release Council for in-depth information about equity release products.
At Commercial Finance Network, we accept equity release mortgage applications from homeowners across the UK. Fast decisions, industry-leading practices and an eclectic panel of specialist lenders mean that our equity release brokerage services bring you immense value.
To request a call back from our team of equity release experts, call us on 03303 112 646 or drop us a line here.