If you are over the age of 55 and own a property (or at least part of it), equity release can be a method for releasing a portion of its value while you remain living in it. If downsizing is not for you, equity release might be an option for generating funds. Blacktower UK provides specialist advice for pre and post retirement financial planning, including inheritance tax planning, and can help you create an effective strategy for your financial future with knowledge and expertise.
Here we explain some of the key issues to understand when considering equity release.
Equity release is a big step with numerous implications for you and your family in the future. It is crucial that you seek specialist financial advice before you make any decision in this regard.
What is equity release?
Essentially, the term ‘equity release’ refers to a range of solutions that allow home owners access to the cash value that is tied up in their property.
Equity release can form part of your overarching retirement funding and, depending on the equity release product you choose, can release the cash as a lump sum, in smaller regular sums known as drawdown, or as a combination of the two.
How do I release equity in my property?
There are several types of equity release product, so research is always the first step. Then you will need to seek specialist advice to ensure that equity release is right for you.
The most commonly used equity release products are Lifetime Mortgages and Home Reversion.
Lifetime mortgages
There are several types of lifetime mortgage available, including lump sum, drawdown, and interest only products. Lifetime mortgages are probably the most commonly-used equity release solution, but this doesn’t make them right for every situation.
Taking out a lifetime mortgage means you receive all or part of the value of your home without the requirement to make repayments while you’re alive (unless you want to). This can enable you to stay in your home and enjoy your investment during your lifetime.
The interest on a lifetime mortgage loan is ‘rolled up’ and added to the loan amount, and will be paid back when your house is sold upon your death or if you move into permanent residential care.
Retirement interest-only mortgages, known as ‘RIO’ mortgages, allow interest to be paid off during the lifetime of the loan to avoid the rapid growth of compound interest i.e. paying interest on the interest which has already accrued.
Lifetime mortgages vary greatly from lender to lender and product type, so it’s important to understand all the terms and conditions specific to the loan you are considering before going ahead.
Home reversion
Home reversion is the sale of part or all of your home to a home reversion provider at less than its market value – typically, between 30% and 60% below, with younger home owners receiving the lower end of the scale.
You will receive a tax-free lump sum, or regular payments (an income), equal to the percentage value of your home that you have sold and you will be able to live in the property rent-free.
To pay back the home reversion plan, your property will be sold on your death or when you need to go permanently into care. The proceeds of the house sale will be split between you or your estate and the home reversion provider, depending on the percentage of the property you own.
The terms of home reversion plans and associated leases are varied and complex. Careful consideration should be taken when entering a home reversion equity release plan as they are high-risk products which can be extremely costly if house prices rise.
Is equity release right for me?
Whether equity release is suitable for you will depend on your individual circumstances. Each type of equity release has a set of pros and cons which will affect your decision making process.
If you have significant equity tied up in your property and you don’t want to move house, equity release can generate funds to help you to live comfortably during your retirement and still leave an inheritance pot for your family in the future. It could also fund a specific plan, such as travelling or helping a loved one to buy their own property.
However, while it is tempting to think about what the boost of equity release funds could do for you in the very near future, you should carefully consider the longer-term consequences for your personal financial stability and for your potential beneficiaries on your death.
What do I need to be aware of when considering equity release?
First and foremost, equity release is not the only method for generating income for your retirement. As a property owner, downsizing can be a great way to release equity in a way you can control with more certainty. The expert financial advisers at Blacktower UK can help you plan for your retirement so that you have an effective income source, combined with the preservation of assets for your loved ones on your death.
Each equity release plan will have its own terms and conditions, but some of the main items to be aware of are as follows:
Disadvantages
- ‘Roll up’ interest can quickly add up. For instance, a 4.1% interest rate over ten years on a £100,000 lump sum would mean compound interest costs of £55,000 to be added to the initial loan amount.
- Your loved-ones’ inheritance pot could be reduced to very little.
- There will be costs and fees involved; lender fees, solicitor fees and fees for specialist equity release financial advice.
- There may be an early repayment charge if you decide to pay back all or part of the loan during your lifetime.
- Your means-tested benefits might be affected.
Advantages
- Tax-free cash to spend as you like, when you choose.
- You can stay in your own home until you die or need to go into care permanently.
- No monthly repayments (unless you want to and are able to).
- Lifetime mortgages provided by members of the Equity Release Council guarantee no negative equity, so you can be sure no debt will be transferred to your family.
- Can help with Inheritance Tax planning.
How can Blacktower UK help me with equity release?
We can help our existing clients with all the important aspects of retirement planning, including providing support for those who are considering equity release as an option.
If you have significant assets, pre or post retirement, and would like to discuss your broader wealth management and inheritance planning concerns, including Inheritance Tax Planning and mitigation of IHT, then please contact us for a discussion of your requirements.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.