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The number of homeowners using Equity Release to unlock wealth tied up in their property is on the rise. Yet, research suggests that it’s an option some still don’t fully understand. It could mean some are making a decision that isn’t right for them and their goals.

First, what is Equity Release?

It’s a term that refers to products that allow you to access property wealth. There are several different types of these products but the most common is a Lifetime Mortgage. This allows you to access either a lump sum or ongoing payments from your home as tax-free cash. You don’t have to sell your home or downsize. Instead, the money borrowed, along with the interest, is usually rolled up over time. This is repaid when you die or enter long-term care.

To be eligible for a Lifetime Mortgage, you’ll typically need to be over the age of 55 and own a significant portion of your home, though not always outright. If it’s a leasehold property, there will often be restrictions depending on how long remains on the lease.

As property prices have risen over the last few decades, your home is likely one of your most valuable assets. As a result, accessing this wealth to fund retirement or other plans can seem like a straightforward decision. However, there are drawbacks to consider first.

Homeowners unlock £935 million in three months

The figures tracking how much wealth homeowners are accessing through Equity Release indicate that it’s become an important part of retirement planning.

In the first quarter of 2019 alone, more than £936 million was accessed, according to statistics from the Equity Release Council. It represented an 8% year-on-year increase. In terms of the number of people using Equity Release, the same quarter saw a 10% year-on-year increase to 20,397 customers served in the three-month period.

Equity Release is becoming a product that more homeowners are contemplating. Yet, according to Canada Life, 15% of UK homeowners say they wouldn’t use Equity Release to fund retirement because they don’t understand it. This is a threefold increase when compared to 2016.

This lack of knowledge could mean that some homeowners are missing out on an opportunity, while others may forge ahead with Equity Release when it’s not right for them.

The pros and cons of Equity Release

If Equity Release sounds like an attractive option to you, it’s essential that you weigh up the benefits and drawbacks before you go ahead with plans.

Pros Cons
 

Equity Release gives you a way to access the wealth that’s locked in property. It’s a step that can help fund your desired retirement lifestyle.

 

 

After using an Equity Release product, you won’t be able to use your home to secure other forms of borrowing. This may limit your options in the future.

 

As an Equity Release is typically paid when you pass away or move into long-term care, you won’t have to make ongoing payments, this can improve your overall income.

 

 

As you aren’t making repayments to reduce debt, interest can mount up quickly. What can look like small amounts in the short term can be far greater when you look at the impact in ten years’ time. If this is a key concern, there are some products that allow you to pay the interest.

 

 

Whilst downsizing has been the traditional way to access property wealth, you may not want to move home. Equity Release can provide you with an alternative solution that suits your retirement plans.

 

 

The money received through Equity Release products is tax-free. However, the additional capital may affect the pension benefits you’re entitled to depending on your circumstances.

 

You can’t owe more than your home is worth thanks to no negative equity guarantees. This can give you peace of mind. This is a feature on many Equity Release products, but not all, so it’s important to check.

 

 

It’s important to look at how an Equity Release product may affect your future plans. Early repayment often comes with costly fees and other restrictions may apply, such as your ability to move home.

 

 

If you’re worried about Inheritance Tax (IHT) liability, spending some of the wealth locked up in property can provide a way to reduce the value of your overall estate and, therefore, an IHT bill. If IHT is a concern, please speak to us, there are often many options to reduce the bill.

 

 

Equity Release will reduce the value of your estate and could affect what you plan to leave behind for loved ones. If leaving a legacy is a priority, you should consider the impact using property wealth will have.

5 alternatives to Equity Release

If you decide that Equity Release isn’t the right option for you, there are other routes to consider, including these five.

1. Downsizing: Downsizing to a cheaper home is the most common way to access the property wealth you’ve accumulated over the years. Whilst it means moving, you won’t have to worry about ongoing financial commitments or interest adding up.

2. Using other assets: Depending on your circumstances, you may have other assets that can be used to help you achieve your goals. Speaking to a financial planner can help you understand how to get the most out of your savings, with your plans in mind.

3. Reassess plans: If you’re struggling to secure the financial means to achieve goals, it may be time to reassess what you had in mind. Sometimes, scaling back may be necessary.

4. Interest-only retirement mortgage: This type of mortgage can act like a Lifetime Mortgage, except you will make ongoing interest-only repayments. As a result, the interest doesn’t mount up as it can do when using Equity Release.

5. Loan: If you would like a lump sum for a one-off outgoing, a loan may be an alternative for you. You’re likely to secure more favourable interest rates over the long term, but you will need to have the income to meet the repayments.

If you’d like to discuss your retirement finances, including Equity Release, please get in touch with us. We’ll help you understand what your options are and the long-term impact of your decisions.

Please note: Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.