If you are looking at ways to supplement your income or accessing a large capital sum, then you may be thinking about how your home could help without the need to downsize.
When all other options have been considered, one viable option to improve your finances, which is generally available to those over the age of 55, is equity release. Also known as a lifetime mortgage, these arrangements release capital that is tied up in your home to supplement your finances, either as a lump sum or a regular drawdown to supplement income as and when required. These “drawdowns” can be used to fund a holiday, replace your car or help your children during your lifetime for example. If you have an existing mortgage, where the lender is asking you to repay, equity release can also help.
The amount that can be released is dependent on your age and property value, with typical borrowing levels of 30% to 45% for someone aged between 65 and 80. Health also plays a part, with higher borrowing levels available to those considered to have impaired lives.
Guide to equity release
An equity release mortgage lets you release cash from your property without leaving your home – so there’s no upheaval or expense. The money you release can be used for anything you need it for, such as supplementing your pension income, helping your children or going on a big trip.
Depending on the type of plan you choose, there are typically no monthly repayments. This means there is no reason to worry about long term payments, as you can stay in your home for life, or until you choose, or need to move, or on death. Interest is rolled up alongside your mortgage, with current rates of interest at an all time low.
Why would you consider equity release?
There are many reasons why you may decide to release equity in your home, including the following:
- supplement your pension income.
- pass on money to your family while you are still alive.
- fund a once-in-a-lifetime holiday or trip.
- renovate your home.
- pay off a loan, clear a mortgage or pay off a residential mortgage.
What types of equity release plans are available?
There are many equity release plans on the market. We are able to compare the whole market, to identify the most suitable product and provider to suit your individual circumstances. Holden & Partners is authorised and has equity release accredited advisers to help you navigate the market and options available.
There are two main types of equity release plan:
- A lifetime mortgage: This type of loan is secured on your property and is called a lifetime mortgage because you will NOT need to make monthly repayments on funds you have released form your home. Instead, the interest is ‘rolled up’, meaning you pay it at the end of the loan (usually your death) plus the loan amount, when the property is sold.
- A home reversion plan: With this type of equity release, you sell all or part of your home in return for either a tax-free lump sum or a regular income to bolster your pension. The home reversion plan includes a guaranteed lifetime lease, with no monthly repayments to meet, so you can live at home for free until you die. After your death, the house is then sold and the lender gets back its percentage share. Please note that Holden & Partners is NOT authorised to advise on home reversion plans.
Save money with a drawdown plan
When considering releasing cash from your home, you may want to think about a plan with a drawdown facility. This is a flexible equity release scheme that allows you to release the funds over a period of time, or to “draw down” as and when you need the money. The major benefit of this approach is that you can reduce the amount of money owed when the plan comes to an end, as you only accrue interest on the released funds when you actually withdraw it, not the full facility.
Large numbers of homeowners have already unlocked funds in their homes to give themselves a much-needed financial lift. However, it’s important to remember that taking out any kind of equity release plan will reduce the value of your estate available to your beneficiaries. As a result, we encourage all family members to be involved in the decision. It can also affect your entitlement to state benefits.
There are also additional costs to consider, including arrangement and valuation fees, as well as the conveyancing costs, so you should discuss this with your lawyer before proceeding. We will also agree a fee with you.
It must be stressed that we consider equity release to be an option of last resort, and whilst we only recommend providers who offer a no negative equity guarantee, over the longer term the roll up of interest can be substantial and so may not be suitable for all.
Financial Planner & Partner