If you’re approaching retirement and living in a home you’ve owned for a while, it could be your biggest asset.
Of course, the problem with this is that there’s nothing much you can do to benefit from it if you’d like to keep calling it your home. Or is there?
Equity release can help you unlock some of the cash tied up in your home, without you having to move out.
With the help of SunLife, we found out a bit more about equity release and how it can work for you. Take a look:
- What is equity release?
- Different types of equity release
- How can help it help?
- Important things to keep in mind
Equity release allows individuals aged 55 and over to release money from the property they live in without having to make any monthly repayments.
You can opt to do this with a tax-free lump sum or smaller cash injections to top up your retirement income.
According to the Equity Release Council, equity release can play a crucial role in retirement funding, with flexibility and safeguards built into plans.
In order to qualify for equity release, you must be the homeowner and your property will need to be of standard construction and worth more than the minimum value required by your provider, usually around £70,000.
The ‘catch’ is that the income-provider must be repaid at a later stage, usually when the homeowner dies. Thus, equity release is particularly useful for elderly persons who do not intend or are not able to leave a large estate for their heirs when they die.
There are a variety of ways in which you can release cash tied up in your home without having to move out.
You borrow against the value of your home while you continue to live in it. You don’t have to make repayments, instead interest is added to the mortgage and both are repaid when the property is sold.
The total you can borrow will depend on your age, your health and the value of your home. The loan plus interest is repaid when the property is sold — typically, when you die or leave your home permanently (e.g. you go into long-term care)
Home reversion schemes
You sell all or part of your home at a reduced price and, in exchange, live rent-free for life in your home and receive a cash lump sum.
Deciding on an option
Deciding on which one of these options you go for will depend on the following:
- The value of your home
- How much equity is available in your home
- Your age
- Whether you would like to leave an inheritance
- Whether you want to retain ownership of your home
While chances are pretty good you have some form of retirement fund in place, there is always the worry that it won’t last long enough.
By opting for an equity release, you will have access to extra funds without having to put yourself in the uncomfortable position of having to sell important assets, such as your home.
It also puts you in the position to put your funds toward some of the following:
- Clear your debts
- Retire a little earlier than planned
- Top up your regular income
- Do home improvements
- Adapt your home to changing needs
- Help your children invest in property
- Pay medical bills
- Take regular holidays
- Help your children pay off education fees
There are really endless ways in which you can put the tax-free payout you get from an equity release to good use!
In many ways, equity release almost sounds too good to be true. And, sure enough, there are quite a few things to keep in mind before making your final decision to borrow against your home.
Consider the following:
Releasing equity from your home will reduce the value of your estate and the amount you’re able to leave as an inheritance when you die.
If you don’t have kids or dependents, this is probably not problematic to you! However, if you do want to leave some money for your loved ones when you’re gone, it’s a good idea to discuss your options in depth with a financial advisor.
Your home’s value
The future market value of your home may increase or decrease over the years, which could have a negative impact on the amount that needs to be paid back when you pass on or leave your home for good.
This could put an extra financial burden on yourself and your loved ones.
Equity release may affect your tax position and your entitlement to state benefits.
As mentioned earlier, it’s of the utmost importance that you talk to a financial advisor before making any final decisions about equity release, as the consequences will be long-lasting.
Before borrowing against your home, you might want to explore other financing options.
Here are few ideas:
- Do you have any savings and investments that you could use?
- Could you move to a smaller property? Remember to take moving costs, fees and stamp duty into account
- If you only need a relatively small amount of money, would an unsecured loan be easier? Or could you borrow it from a family member and repay them from your estate?
- If you still have a mortgage, is it possible to extend your mortgage term for a few more years? (This is likely to depend on your age)
- If you’re on a low income, have you checked what grants or benefits you may be entitled to?
- How to decide what to do with your pension pot
- Get what you’re entitled with the state pension changes
- How to retire early whatever the state pension age is