Releasing Home Equity as Part of Retirement Planning: What are the options?
“Oh, I can’t wait to retire!” – words often heard. However, everyone would like to live a comfortable retired life. And that will not be possible unless there is sufficient financial backup.
For this, home equity release could be one of the options, especially when planning for retirement – whether it is early retirement, saving for retirement or because redundancy has set in before reaching the state pension age.
What is home equity release? It is a way of releasing money from your property without having to move. It sounds so easy but as all market participants are aware, including Berkhamsted Estate Agents, there are also risks involved. We explain below:
There are 2 major options for home equity release:
Lifetime mortgage: This allows you to take a tax-free cash loan against your home without moving out. Homeowners have to be 55 years or over to avail of a Lifetime mortgage. The money can be taken either in a lump sum or in installments. Although no monthly repayment needs to be made, interest will accrue. If possible, the monthly interest amounts could be paid, which will reduce the total interest accrued and will lessen the amount finally owed. The repayment is made by the sale of the property when you move permanently into residential care or pass away.
Benefits: A lifetime mortgage could help in paying off an existing mortgage, gifting money or making improvements to the home. Flexible repayments are possible. You do not need to move home. There is an option for inheritance protection.
- Interest rates for lifetime mortgages are usually higher.
- Early Repayment Charge could apply.
- If money is gifted, there could be inheritance tax payable by the recipient.
- Means-tested benefits such as pension credit, income support, council tax support, universal credit etc could be affected as they are calculated on your capital amount and income.
Home reversion: This plan allows you to sell a part or the whole of your home to a reversion company in exchange for a tax-free payment – cash all at once or in regular payments. You will have a rent-free lifetime tenure there or until you move into long-term care. You need to be at least 65 years to avail of this.
Benefits: It is tax-free. You will get a good percentage of the full market value, depending on your age – the older, the higher the amount. Any increase in the value of the property will be beneficial. The percentage is a fixed amount so an inheritance is guaranteed. No interest is payable.
- The ownership deeds will be transferred to the provider, with you retaining a beneficial interest in the property.
- Though it is tax-free, your entitlement to means-tested benefits could be affected. Your eligibility to claim and the amount you receive will depend on your capital and income.
- Releasing home equity will lower your estate’s value and prices in future may be higher or lower.
- Secured and consolidating debts can occur, which can result in more payment overall.
Drawdown plan: This allows an initial amount taken in cash, with the remaining funds kept in reserve. These can be drawn upon when required. Interest accrues only on the first payment amount and then on any additional “drawdowns”. It saves in total interest amounts paid.
Retirement Interest Only Mortgage: It is a loan against your home, eligible to people over 55 years. Only the interest is paid monthly, and the loan amount is retrieved when the house is sold after death or movement to residential care. If the repayments are delayed, the house could be repossessed. It is similar to a conventional mortgage, but there is no fixed term. If you need to pay an existing mortgage, releasing this type of home equity could help.
Downsizing: Selling your property and releasing equity from the sale could allow you to buy a smaller, less expensive one. Additional funds can support your retirement lifestyle. Downsizing could involve moving costs and other legal fees.
Conclusion: Planning for retirement is always wise. Considering the options and risks involved, it is essential to carefully consider before you decide on your retirement plan. Financial and legal commitments need to be studied and a professional equity release adviser will be ideal to provide the same. Once clarified and a decision taken, your retirement will be well planned with a comfortable future to look forward to.