If so, equity release might be the right scheme for you.
Equity release plans help you if you are asset rich but cash poor. You can get the money you need for a comfortable retirement without losing your home or leaving debts on your benefactors’ shoulders when you pass away. You can unlock equity without having to move or sell the property you’ve called home for many years.
Many people entering retirement these days find that they don’t have enough money to offer them a comfortable retirement. A full state pension gives you approximately £4,381 a year, but the average retiree needs an additional £4,206 above this amount to live on. Even if you have the additional £4,206, this total amount merely supports you and doesn’t guarantee you a comfortable lifestyle. Most retired people estimate a comfortable retirement costs £18,000 a year – over 4 times the amount a state pension offers. Therefore, an approximate 14% of pensioners have to return to work in order to support themselves.
4 out of 5 retirees haven’t planned on how to cover the cost of long-term care, forcing 28% of retired people to depend on statutory help. But you may find you’re not eligible for as much help as you anticipated since your local authority only contributes to your long-term care if your assets amount to less than £20,500. Additionally, if you are funded by the local authority you might have a charge put on your property that has to be paid after your death.
Your home is your most expensive asset, so make sure you talk to a professional adviser who can find the right equity release scheme for you and make sure you understand everything about your loan.
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There are a number of things you can use your money for, but the most common uses of equity release money include:
Keep in mind that money released from your equity is tax free, but you will be taxed if you invest the money and make a profit. Also, make sure not to release more money than you need or you may end up paying interest on money you’re not using (a drawdown option will let you release more equity at a future date so that you only take out as much as you need at the present and avoid paying more interest).
There are two major equity release schemes:
Be wary of other schemes that claim to be part of equity release but are not, such as buy-and-rent-back plans. These schemes are available for all ages and involve a company buying your home for a low price while allowing you to live in it. While these schemes may look tempting, make sure to do your homework and talk to a professional mortgage adviser. Unlike equity release plans, these schemes are not supported by SHIP or regulated by the FSA, so you could easily be in danger of losing your home.
Are there requirements for getting an equity release mortgage?
Yes. You generally have to be over 55 years old (many lenders require you to be over 60), own a property that is in reasonable condition, and have no outstanding mortgage on your home (or if you do, you will have to use your equity release money to pay off your mortgage).
Most equity release mortgages offer you better deals if you are older and/or male. The shorter your life expectancy, the sooner the equity release company can get a return for their money. Therefore, you will be offered the best rates if you are over 70 or 80 years old. Keep in mind what kind of payment will best suit you based on your age. If you are older, a monthly income may not be the best option since your life expectancy is shorter.
Equity release schemes are a bit of a gamble since you can never predict how long you will live for or how your property value will change.
Equity release allows you to access the equity in your property. Since house prices rise, your property might be worth a lot more than you’d expect. The money you receive through equity release can be given to you as a lump sum (thousands of pounds at once) or as a monthly income (£100 or more per month), but you may also have the option to drawdown the cash, which means you access the money whenever you need it. Your scheme may allow you to buy an annuity with your equity release money, which will provide you with an income.
Although some equity release schemes allow you to guarantee your benefactors a certain inheritance, other schemes will cut into the money you leave behind for friends and family. If you don’t have anyone to leave any money to, equity release is an ideal way to enjoy your retirement. If you do want to leave an inheritance, make sure you get an equity release deal that can still provide for your benefactors.
You will pay standard application fees you’d face with any mortgage (£300-£600 for lifetime mortgages, but home reversion plans don’t usually require arrangement fees since they are not loans). Above this cost you will have more valuation fees (approximately £300), solicitor’s fees, and legal costs (£300-£700). However, some of these fees may be refunded once you take out an equity release scheme. You are also responsible for repairing and insuring your home (£200-£300 for building insurance) and you might have to pay Council Tax. You may find that rates are higher than on standard mortgages, but your rate will be affected by your age and your property’s value.
Equity release schemes tend to come with higher early redemption charges (ERCs), especially in the first ten years of your plan. Make sure to check and see what penalty you may face by ending the scheme early or moving house. Some schemes allow you to move with no penalty as long as your new property meets the equity release lender’s criteria. If your new property’s value is not as high as your previous property, you may need to repay some or all of your loan (including interest).
Your taxes may be affected by your equity release scheme, so talk to a tax adviser to review your finances and figure out which equity release scheme best suits your financial situation.
Potentially. Equity release loans are life-time commitments that require financial planning with a professional adviser and your family. Probably the biggest drawback with an equity release scheme is the affect it has on your family’s inheritance. You may be left with little or no money to pass onto your family (if you want to guarantee an inheritance, a home reversion loan might be better than a lifetime mortgage).
Make sure you speak with your family before agreeing to an equity release plan. You may find that your children can support you financially or that they would rather have part of their inheritance given to them in your lifetime (to cover the cost of a wedding, school, or buying a property).
You also need to check your equity release plan and see if it affects your State benefits. You may find your benefits are reduced or lost due to your accessible cash sum from equity release.
No matter what you do, speak to a professional equity release adviser before taking any plan of action. An adviser can not only tell you if equity release is the right choice for you, but can also go over all your finances and find the best scheme at the best rate to suit your lifestyle.
Not anymore. Equity release schemes have come a long way since they were introduced and now they are supported by Safe Home Income Plans (SHIP) – an association supported by leading providers of equity release plans. All SHIP members follow the SHIP Code of Practice which guarantees you won’t lose your home. Furthermore, SHIP equity release members guarantee that you can live in your home for the rest of your life, move to another property without penalty, and never owe more money than the total value of your home. Look for the SHIP logo to see if your equity release plan is protected or visit www.ship-ltd.org/ to see if your lender is a member. To contact SHIP, call 0870 241 60 60.
Equity release plans are also regulated by the Financial Services Authority (FSA), which provides extra protection. If your plan goes against FSA regulations you can seek compensation. If you would like to read more about the FSA, please visit http://www.moneymadeclear.fsa.gov.uk/
SHIP members insist that you talk to a legal adviser to guide you through the relevant legal work required in taking out an equity release mortgage. In addition to seeking independent legal advice, many SHIP members will encourage you to speak to a financial adviser to discuss your equity release options and help you find the best plan. Ask your adviser if they have a CII Certificate in Equity Release to make sure they can offer you the best advice. If you would like to speak to an adviser, please fill in this short form and an adviser will call you soon to let you know if equity release is the right option for you.
The following websites offer useful guides to help you determine if you should pursue equity release. However, you should speak to an adviser before making your final decision.
What are other options if I don’t want to take out an equity release plan?
You may have more success selling your current home and moving into a smaller property. This could provide you with more money than if you took out an equity release scheme (you would have access to all the money from your property instead of letting an equity release company profit from your investment). Besides downsizing, you could also rearrange your investments to make some extra cash. Finances get particularly tricky once you enter retirement. Speak to an adviser who can see if there are other alternatives for your situation or if equity release is your best option.
Just fill in this short form and a mortgage adviser will contact you to answer all of your questions, give you equity release advice, and get you on your way to earning money towards your retirement.
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