Published on: 29th July 2020
With property prices rising considerably in recent decades, it’s likely your home is one of the most valuable assets as you approach retirement. It could be used to boost your retirement income. However, research shows there’s a lack of understanding about what Equity Release means and how it can help you.
Equity Release is a term that can be used to cover two types of products, lifetime mortgages and home reversion. Both of these products allow you to access the wealth tied to property, but a lifetime mortgage is by far the most popular option.
With a lifetime mortgage, you take a mortgage secured against your home but retain ownership. You can choose to either make repayments or let interest roll-up. The loan amount, plus any interest accrued, is paid back when you die, or you move into long-term care and the property is sold.
As people spend longer in retirement, it’s not surprising that Equity Release is becoming a popular tool to finance expenses. £1.06 billion of wealth was accessed via Equity Release in the first quarter of 2020, up by 14% when compared to a year earlier, according to the Equity Release Council.
While the extra money for retirement can certainly be attractive, Equity Release is often a decision that can’t be reversed. So, it’s important to understand the full implications of the decisions. Equity Release will reduce the value of your estate and the amount of inheritance you leave behind for loved ones. Other misconceptions could be affecting decisions relating to Equity Release too.
Equity Release myth 1: You could be forced out of your home
If the thought of losing your home is holding you back from exploring Equity Release products, it’s worth noting you can’t be forced out. Yet, this is something that 22% believe can happen, according to research.
When you choose Equity Release you still retain ownership of the property and have the right to live there for the rest of your life. A provider won’t be able to force you to leave your home if you don’t want to. To recoup the amount you’ve borrowed, the provider must wait until you pass away or until you move into long-term care, in which case, the property would be sold.
Equity Release myth 2: You can’t move home
As we get older our needs changes and there may be a point when you want to move home, whether it’s to purchase a more accessible property or move closer to home. One common myth around Equity Release is that you won’t have this option. In fact, 42% of over-55s believe this is the case.
However, Equity Release products increasingly offer flexibility, including moving to another property. In many cases, you can transfer your Equity Release debt to your new home. But this may come with some restrictions, the provider will want to ensure the property you’re moving to offers enough security for the money you’ve borrowed.
Equity Release myth 3: You won’t be able to leave an inheritance for loved ones
Leaving a legacy for loved ones is a priority for many retirees and it’s a goal that can hold them back when it comes to Equity Release. Research found 19% of over-55s were unsure if they could still leave an inheritance to loved ones if they accessed property wealth.
This one will depend on your personal situation, the assets you have and the amount you access through Equity Release. If leaving a legacy is a priority, this is an area where financial planning is important. We can help you understand how taking equity from your home will affect what you leave behind for loved ones, giving you peace of mind.
Some people are using Equity Release to provide financial gifts to loved ones during their lifetime rather than waiting to leave an inheritance. This can be a useful way of helping younger generations with challenges they face now, such as getting on the property ladder. If this is something you’re considering, please get in touch, we can help you make the most of your gifts and understand the short, medium and long-term consequences of your decisions.
Equity Release myth 4: You’ll owe more than your home is worth
Owing more than your home is worth is a common worry. No one wants to see the value of other assets depleted to pay back an Equity Release loan, reducing the inheritance left behind.
However, most Equity Release products now have a ‘no negative equity’ guarantee. This means the loan, along with any interest accrued, is capped at the total value of your home, preserving other assets. If this is a concern and you want to use an Equity Release product, make sure you check it comes with this guarantee.
Equity Release myth 5: You’ll have to make regular repayments
Having additional outgoings in retirement can affect your long-term plans. So, it’s natural to worry about how you’d meet regular repayments after taking out a loan secured against your home. The key thing to remember with this myth is that you have a choice.
Typically, an Equity Release product doesn’t require you to make any sort of repayments during your lifetime while you remain in your home. Instead, the full amount, including any interest, is paid back after you pass away or move into long-term care.
But some options do allow you to make repayments if you choose, for instance, paying the interest each month. There are benefits to doing this if your income allows for it, it’ll mean the loan value doesn’t rise and it will preserve inheritance, for example. However, this is a choice and not something you must do to use Equity Release.
If you’d like to discuss whether Equity Release is an appropriate option for you, please contact us. We’ll help you understand the pros and cons with your priorities in mind, as well as exploring alternative options for increasing capital in retirement.
Please note: Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.