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