For many people, owning a property is central to them being able to live the retirement that they hope for. A property is an asset that will rarely deplete significantly in value if it is well looked after, and most property owners keep this in mind when they are considering their retirements.
There are several ways that you can use your property to help yourself financially during retirement, and these often include using some of the equity that you have built up in your property to use as an income to supplement your pension.
When you are considering ways that you can use your property to help with your income during retirement you might hear people talking about equity release, lifetime mortgages and home reversion plans. But what are they and what is the difference?
What is equity release?
The term ‘equity release’ refers to any financial product that gives you the opportunity to borrow money against the value of your home. It means that you can benefit from the equity that has been built up in the property without needing to sell it.
It is important to remember, however, that equity release can be a big commitment, usually for the rest of your life. There are two types of equity release available to most people – a lifetime mortgage and a home revision. These each work in a different way, suiting different people in different situations.
A lifetime mortgage is the common type of equity release with the majority of people opting for this solution. A lifetime mortgage is usually open to homeowners of 55 years old or more. In this case, a lender will offer you a ‘loan’ that is secured against your home. You will not pay any money back until the house is sold when you pass away or go into long-term residential care.
Some people choose to try to pay some of this money back earlier, but this is not required.
If you have taken out this agreement jointly with someone else, the loan will end when the last person passes away or goes into long-term residential care. It is usually the case that the older you are, the more you can borrow – normally up to about 60% of the value of your property.
If you are going to take out a lifetime mortgage, it is important that you check that there is a ‘no equity guarantee’ in place. This means that if the value of your property goes down over time, your family will not be liable for paying anything extra on your property.
Your interest payments will be fixed for the period of the loan. You will have the choice whether you wish to pay interest or not during the period of the mortgage. If interest is not paid it is compounded and repayable when your property is sold. You will also have the option of repaying the capital borrowed, usually up to around 10% per year, before incurring early repayment penalties.
Equity release or home reversion
In a home reversion situation, a segment of your property is essentially sold to a provider in exchange for a lump sum or regular payments – usually between 30% and 60% of the value of the property. The minimum age for this option is usually 65 years old. You are able to continue living in your home (rent-free), but it is stipulated that you must keep it maintained and insured.
It is important to remember that, with this option, everything is calculated in percentages – regardless of how the value of the property changes. The provider will buy a certain percentage, and you will also keep a certain percentage.
A home reversion plan means that there is no interest charged for the money that you get either as a lump sum or regular payments, but, although you are able to stay living in the home, you are, essentially selling a proportion of your home to somebody else.
Again, if you are entering into a home reversion agreement, you should ensure that you have a no negative equity guarantee to protect your beneficiaries when you pass away. You should also be aware that any equity release product could adversely affect your entitlement to means-tested state benefits. It will also have implications on inheritance tax and long term financial planning.
If you are looking to release some of the equity in your property either through a lifetime mortgage or home reversion, it is recommended that you get proper financial advice from an Independent Financial Advisor, and one who is preferably a member of the Equity Release Council (ERC). The ERC sets out standards and requirements that should be adhered to by those working in the area of equity release and home reversion, which provides protection for consumers seeking to enter into such arrangements.
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Last reviewed on 11/07/23 by Abigail Gray who is an Associate Solicitor