Find Out How Equity Release Can Make Your Retirement More Enjoyable?
A recent report undertaken by Prudential asked retirees what they don’t enjoy about retirement, an overwhelming 57% answered that financial problems effected how they enjoyed their retirement. While there is no way to go back in time and improve their retirement plans there is a solution to help them with their financial worries. Equity Release.
Here we will explain what equity release is, how it works, the benefits and things to be aware of when taking out a scheme. If you have any questions that we have not answered in this article or would like to discuss equity release with an adviser please do not hesitate to email us or call us on 01727 85 22 99.
What is equity release?
Equity release allows you to release money from the value of your property whilst retaining full ownership of the property.
The money released from your property is typically not paid back in monthly instalments; instead the money will be paid back by your estate when you either go into long-term care or when you pass away and as a result your property is sold. As with a mortgage, your property is the security for borrowing the money.
Interest accumulates on the money released on a yearly basis, so if for example you released £80,000 from the value of your property at an interest rate of 5%, after one year you would owe £84,000 and so on.
There are two types of equity release:
- Home reversion mortgage
- Lifetime mortgage
What is a home reversion mortgage?
Through a home reversion mortgage the homeowner effectively releases equity by selling part of or their entire home in exchange for cash. However they have the right to remain in the house until they die. The property is sold on death and the percentage which is mortgaged is applied to the sale price and this sum is paid to the mortgage company.
What is a lifetime mortgage?
A lifetime mortgage acts much like a normal mortgage, in that you borrow money with your property as security. However you only pay back the capital in the event of death. Within lifetime mortgages there are two types of plans:
Roll-up mortgage – interest is rolled up and added to the original mortgage. So while there are no monthly repayments the total amount owed increases over time.
Retirement mortgage – with this arrangement you are required to pay monthly payments as you would with a regular mortgage. However this differs from the regular mortgage as there is no redemption date. With most plans you will be able to switch to a roll-up mortgage if you are unable to keep up with the payments.
What can you use the money from equity release for?
In short, anything! We have helped clients with equity releases for a wide range of reasons from supporting their retirement income or go on the holiday of a lifetime with their family to building an extension on their home.
Some of the most common uses are:
- Undertaking home improvements
- Go on the holiday of a lifetime
- Invest in a holiday home
- Purchase a new car
- Make an alternative investment
- Loans/gifts to family to help them with something such as a deposit
- Help with grandchildren’s school fees
- Top up’s to Pensions.
Once you have received the funds from the equity release they are yours to spend as you like.
What are the benefits of equity release?
There are numerous pros and cons to equity release; ultimately it comes down to if it is the right decision for you and your current circumstances.
Benefits listed below are general and will apply differently to different circumstances.
- Gives you access to money tied up in your property to use when you need it
- Provides you with tax free cash or income.
- Allows you to remain in your own home.
- Unlike a traditional loan, no monthly repayments are required.
- Equity release is a highly regulated financial product.
What should I be aware of when considering equity release?
Before taking out a mortgage you are encouraged to undertake professional advice from an independent adviser, like KDW. They will be able to assess your circumstances and discuss the available options to you.
However there are a few basics that you should be aware of when considering releasing equity:
- Equity Release can be a sensitive matter as it affects the inheritance you are leaving behind for your loved one. We always recommend discussing your plans with them.
- If you are in receipt of state or welfare benefits then releasing capital with equity release could impact upon the amount of benefits you receive.
- Be aware of how the interest will build up and impact the value of your property when you pass away.
- Equity release is typically a lifetime commitment, if you decide that you would like to pay back the money you have taken out with equity release then you are likely to face early repayment charges which could be incredibly expensive.
Common Concerns
Below are some of the most common concerns our clients have had when trying to decide if equity release is the right option for them:
Q. Could I lose my home if I have used an equity release plan?
A. It is important to safeguard against this by ensuring you release cash from your property safely. Equity release advice and plans are fully regulated by the financial conduct authority. This means that customers who take out an equity release plan are protected throughout the entire process.
Another way to safeguard your home is to choose an equity release plan that has been approved by the Equity Release Council. Plans approved by the Equity Release Council allow both you and partner to remain in your property until you have both passed away or moved into long term care.
Q. I have an outstanding mortgage, am I able to use equity release?
A. Whilst you are able to release fund from your property with an outstanding mortgage in place, you will be expected to use those funds to pay off the remaining mortgage first. So if you are looking for funds for a holiday or car this may not be the most suitable option for you.
Q. If I have released funds from my property will I be able to leave any inheritance to my loved ones?
A. The amount of inheritance you are able to leave from your property will be reduced if you used an equity release arrangement. However there are plans which allow you to leave inheritance to your loved ones. An independent financial adviser will be able to discuss the different options with you.
Q. What happens if my partner or I need to move into long-term care?
A. If you are the sole occupant in your property your equity release plan will end and your house will be sold and the debt repaid in full. However if you are part of a couple and only one of you moves into care then the other partner will remain in the property until they pass away or the time that they too move into long term care, at which time the equity release plan will come to an end.
Interested in finding out more about equity release?
You should always take professional financial advice before taking out any equity release schemes. An independent financial adviser, like KDW, will be able to discuss the different options available to you.
We understand that signing up to an equity release plan is a big commitment, therefore we will assess if this is the best way for you to access the funds you require (if there are other options more suitable to you we will be able to go through these with you) and discuss any implications an equity release plan may have on you and your inheritance plans.
For more information please contact us on:
Tel: 01727 85 22 99
Email: mortgages@kdw.co.uk
KDW are independent financial planners headquartered in St Albans, Hertfordshire. We provide a one-stop-shop for financial planning offering advice to clients on investments, mortgages, pensions, assurance, commercial finance and tax planning. We also offer a market leading alternative to selling and letting properties through our sister company KDW Property.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
KDW is a trading style of K D Wright Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority. Registration No: 509886.