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Is equity release right for me?

Since it became a formally regulated retirement product in 1991, equity release has enabled over half a million UK homeowners to access over £30bn from their homes.

Yet, despite its growing popularity, many retirement planners are still unaware of what it is, or what benefits it might offer.

Put simply, equity release allows homeowners to access cash tied up in their home. The criteria aren’t strict either – all homeowners aged 55 or over are eligible.

For some, this can be an incredibly effective way of injecting an immediate cash boost to retirement savings. And there are multiple types of equity release available to suit a variety of different circumstances….

Lifetime Mortgages

The first and most popular option is a lifetime mortgage, which allows homeowners over the age of 55 to borrow against a percentage of their property. Generally speaking, individuals borrow between 18 and 50% of their property’s value. The retiree in question can choose to receive the amount they borrow as one lump sum, or in several smaller amounts given over a set period of time.

There are different types of lifetime mortgages available, such as interest only, or drawdown lifetime mortgages. So, pensioners would be wise to thoroughly explore different options to find a plan that best suits each individual’s financial circumstances.

There are certainly advantages to taking out a lifetime mortgage. Firstly, the retiree continues to own of their home. This means that individuals can benefit from any future increases to the property’s value, and will be able to protect an inheritance for their family in the future. There is also no requirement to make monthly repayments with a lifetime mortgage – a prospect may pensioners find appealing.

That said, there are some drawbacks. Firstly, the size of the mortgage will grow overtime. This is because interest is added to the original loan amount, which can cause the final repayment total to snowball.

Additionally, interest added is compounded – this has the potential to eat into the inheritance a retiree wants left behind when they die. What’s more, it can be difficult to reduce the final repayment total, as some providers impose early repayment penalties, although most plans fix these at outset.

Home Reversion Plan

Alternatively, a home reversion plan could be appealing to older retirees. This plan enables homeowners aged 65 and over to exchange a portion of their property for a tax-free lump sum, which is usually below market price. The retiree in question is then able to live in the property, rent free for the rest of their lives.

The scheme can be particularly beneficial for older pensioners, as the older an applicant is, the larger the percentage of the property they can typically exchange for cash. What’s more, home reversion plans inform an individual from the outset exactly what share of the home can be left to loved ones in their estate.

Although, it should be noted that the retiree won’t be able to reap full benefits of potential increases in the property’s value, as a percentage of the valuation will always go to the provider. Additionally, if a retiree chooses to buy back the provider’s portion of the property, they will have to do so at market value, not at the discounted rate it was originally sold for.

Is equity release right for me?

Equity release can be an incredibly useful tool to give one’s retirement income an immediate cash injection. However, those considering taking equity from their property should carefully consider their existing financial situation, and long-term goals before committing to this plan.

There are alternatives to equity release which need to be considered, can money be raised from other sources, should downsizing be considered or a Retirement Income Mortgage (interest serviced)

There is no one-size-fits-all approach to retirement finances, and equity release is no different. So, anyone considering equity release to seek independent financial advice before making a decision.

After a thorough audit of a person’s circumstance, advisers may conclude that it is a viable option, or they might suggest other alternatives. Following this consultation, retirees will be empowered to make an informed decision and pursue the route that best suits their needs.

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