What is equity release?

Posted on: 06-02-2018 in Financial Planning

“What do I need to know about getting an equity release loan?”

Latest figures in The Telegraph reveal that in 2017 more than £3bn was released from British properties, up by nearly £1bn on the previous year. In fact, the last three months of 2017 broke all previous “equity release” records. With record numbers of people cashing in on their properties, and the trend set to increase, equity release plans no longer represent a last resort financial strategy.  Instead they have become an enticing feature of the modern retirement plan, and it’s easy to see why. Whether you are looking to help fund travel plans, gift a family member, or simply afford some luxury in those well earned golden years, unlocking the capital tied within your property is an attractive option for many. But borrowers also need to be mindful about the charges involved in equity release, as well as the potential financial impact on their retirement plans. Consulting your financial advisor can help you make these important decisions while considering all of the facts.  

What is an equity release loan?

Equity release loans, otherwise known as “lifetime mortgages”, allow you to borrow against the value of your home in the form of a one off, or irregular lump sum payments. Interest usually rolls up and is paid off on the sale of the property, either upon death or when you move into long-term care.  

How does it work?

First and foremost, your home remains your own.  Furthermore, most equity release loans guarantee that you will never need to pay back more that the value of the property, thereby offering a sense of security and peace of mind for those you leave behind. There are two types of lifetime mortgages:

1. An interest roll-up mortgage means that the interest is added to the loan and paid off upon the sale of the house.
2. The interest-paying mortgage allows you to make regular payments towards the accumulating interest.

 

Who can benefit from equity release?

Increasing numbers of the over 55’s are tapping into their wealth by capitalising on the falling cost of equity release plans over the last few years.  Whether it’s helping your children to get on the property ladder, or pay off your credit card debts, equity release gives you financial options and the benefits associated with drawing upon, what is for many of us, our largest financial asset. For those worried about the impact of Inheritance Tax, equity release loans can reduce the taxable value of an estate, whilst paying off the mortgage upon death.  Since April 2017, individuals in the UK have been able to claim an extra £100,000 worth of estate before IHT kicks in.  This means that £325,000 value of your estate can now be passed on to a beneficiary without being subject to IHT. In this sense, equity release allows owners of more valuable estates to manage their property’s value and their potential IHT bill. Cashing in on your property’s worth in this way can also help you to pay off your main mortgage, exchanging regular monthly payments for a deferred repayment of the loan. Having this kind of financial flexibility can be beneficial to those looking to free up their invested cash and their curb their monthly expenditures.  

What are the pros and cons?

Pros:

• Cash in on increased house prices and the buoyancy of the current housing market.
• Manage your estate’s value and potentially avoid Inheritance Tax.
• Pay off your main mortgage and save cash.
• Clear high-interest debt (like credit cards).
• Fund retirement in the event of a financial shortfall.

Cons:

• Can have a negative impact on your credit rating and make you less eligible for other types of loans. Make sure you have considered all other options.
• Be wary of mortgaging your property for less than its market value simply to take advantage of an equity release right now.
• Check all terms and conditions for any repayment charges (including early repayment).
• Reduces the equity in your property substantially which may not benefit your beneficiaries if your estate’s value falls below the Inheritance Tax threshold.

 

What are the alternatives?

• Downsizing your property.
• Using savings and investments.
• If you are looking to manage credit card debt, our credit card article from July has some great tips on the deals available and ways to cut down on interest repayments.
• Managing a robust retirement plan to avoid potential shortfalls and longer life expectancy.

 

What do the experts say about it?

Deals are becoming increasingly flexible:

• Most will allow borrowers to make occasional repayments without early repayment charges (so it’s vital to check the small print if this is important to you).
• Drawdown facilities allow you to set aside a pot of money to draw from when you need it.
• With some deals you can now ringfence a minimum amount of your property’s value to leave to loved ones as an inheritance.
• Consider all your financial options before borrowing against your home and weigh up the potential pitfalls with regard to your own financial situation.

 

How much will I be able to release?

To gain an accurate estimate, speak to your financial advisor, but as a rough guide, the average sum released is around £70,0000 (cited in The Telegraph, 23 Jan).    

Should I talk to my IFA about it?

Absolutely.  Talking to your financial advisor can help you make sense of all the information, so that you can make an informed choice about what best suits your needs.  Equity release is not for everyone, so understanding all of your options is vital to managing your finances sensibly.