This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
It is common for people to assume that they can only access cash from their property if they sell it or downsize. There is, however, another option – equity release, which allows homeowners to access a lump sum from your property’s value whilst continuing to live in it. This can sound ideal and certainly is a sensible option for a certain individual’s planning needs. However, it also comes with risks that you need to weigh carefully with a financial adviser.
Below, our financial planning team at Elmfield here in Padiham, Burley, Lancashire explains how equity release works, some common pitfalls to look out for and where it can be a useful tool within a wider financial plan. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
What is equity release?
In short, equity release refers to a range of financial products which you “buy” to convert the value (“equity”) of your home into a cash lump sum. The main qualification is that you need to be a UK homeowner and over the age of 55. There are two main types of equity release:
- Lifetime mortgage. Here, you take out a loan which is secured against your home, and you continue living there. The loan is not repaid until you die or enter long-term care. At that point, your property will be sold and the loan is repaid using proceeds from the sale. To prevent the possibility of needing to repay more than what your property is worth in the future (i.e. due to negative equity), most products will include a “no-negative-equity guarantee” which means you never pay back more than your property’s value. You may be able to secure a higher lump sum if you have certain medical conditions or lifestyle habits (e.g. smoking).
- Home reversion plan. For this approach, you need to be aged 65 or over. This involves selling part/all of your home to a provider who then gives you a lump sum (under the property’s market value) or a regular income. You then get to stay in your home as a “tenant” – without the need to pay rent to the buyer. Typically, when you sell a property under a home reversion plan you get 20-60% of its value handed to you.
Is equity release a good idea?
There are many things to consider when deciding upon equity release. First of all, why do you need the cash? Sometimes, people in their 40s and 50s assume that they can simply rely on this option to fund their retirement. However, it is usually better to build up a retirement pot – e.g. via pension contributions – and your state pension to support your income needs once you finish your career. That way, as a homeowner in retirement, you still have the equity in your property as a back-up option should you eventually need to access it (e.g. to pay for long-term care).
Secondly, if you are nearing retirement and need cash from your home, have you considered downsizing? Selling up and moving into a smaller property – which is easier to manage in old age – can be a great way for retired people to make a “new start” and free up some necessary cash, without being beholden to an equity release provider. However, this may not be feasible or desirable for many people – especially if moving would have a significant emotional and social impact. There are also the financial costs of moving which need to be factored in.
One of the main things to bear in mind about equity release is that it affects the inheritance you may hope to leave your loved ones in the future. A homeowner who dies without equity release can expect to pass their property down to children (via their will), subject to the 2020-21 IHT-free threshold set at £325,000 (plus the main residence nil rate band of £175,000). However, if you take out an equity release product, less value from your home will be able to pass to your loved ones as an inheritance. Under a lifetime mortgage arrangement, for instance, the house will be sold and the proceeds used to pay off the loan. Anything left over (if any) can then be passed to beneficiaries as an inheritance.
Another aspect of equity release to consider is timing. The sooner you borrow, the more interest will compound – and so, the more expensive it will be. As such, for those needing to access the equity in their home, it may be better to borrow a small amount now, wait for a while and then do it once more later on when you need to. Drawdown lifetime mortgage products can make this a much easier process to engage in with your financial adviser.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
