Are you expecting to get the income you need from your pension when you retire?
Living in retirement without enough money is not enjoyable. Far from being the best time of your life, things can be pretty miserable if you’re not able to cover your bills.
According to Age UK research, more than a quarter of pensioners have trouble making ends meet. They don’t have the money to take dream holidays, buy a new car or help the kids through university. Life for them is tough.
“Managing on a low, fixed income is really tough, and many people face a daily struggle just to afford the basics.” Caroline Abrahams, Director of Age UK
But don’t be too hard on yourself if you think you’ll struggle financially after you’ve finished work.
Low interest rates on savings and high housing costs, coupled with limited wage increases have made it hard for a whole generation of workers to make adequate provision for their retirement.
Things aren’t all bad
The good news is that equity release can provide a useful boost to your income.
More than just helping you make ends meet; equity release could provide you with the comfortable, enjoyable retirement that you hoped for.
Unlocking the wealth you’ve built up in your home can make retirement something to look forward to again.
Equity release is now a mainstream source of retirement income. According to the Equity Release Council, homeowners over the age of 55 borrowed £1.61bn using lifetime mortgages in the final quarter of 2015.
“Housing wealth is often people’s greatest asset and it makes sense for equity release to be on every homeowner’s checklist to consider as part of their retirement and estate planning.” Nigel Waterson, Chairman of the Equity Release Council
So, how does equity release work?
There are two main types of equity release available in the United Kingdom, Lifetime Mortgages and Home Reversion.
As the name suggests, Lifetime Mortgages are where you borrow money against the house you own. You borrow money from your provider today which then gets repaid, together with the interest that accrues, from the proceeds of the sale of your property when you die. You still own your home throughout your retirement and can continue living there as long as you want.
Home Reversion works differently. With this type of equity release you sell all or part of your home to the reversion company today and receive a lump sum that you can use to fund your retirement, alongside any other assets you might have. Legal title is transferred to the reversion provider and you become a “beneficial owner” of the percentage you retain. You also have the security of an agreement that allows you still live in your home until you die. You just need to keep the property well maintained and insured.
So let’s get into the detail.
Lifetime mortgages are generally available to people aged 55 or over.
There are strict lending criteria that providers must keep to and you can generally borrow between 25 and 50 percent of the current market value of the property. How much you get will depend on your age. At 65, you’ll be able to borrow at the lower end of that range. Later, as you grow older you’ll be able to borrow more.
If you can live off income from other savings for in the short term it will be better to wait before mortgaging your home.
Lifetime mortgages can be expensive. Rates typically offered on this type of product are much higher than traditional mortgages. And because the interest that accrues over the rest of your life doesn’t get repaid until you die, you’ll end up paying interest on interest.
Even if you only have a lifetime mortgage for 12 years, your estate might end up paying back double the amount you borrowed.
However, if house prices continue to rise your beneficiaries will get to keep anything that’s left over after selling the house and paying off the mortgage. So if you think that the value of your house will grow faster than the interest that accrues on your mortgage, this might be the right choice for you.[Note: if you want to work out when you can can afford to retire, download a copy of our 6-step process. It walks you through step-by-step how to build the ultimate retirement plan.]
People often get worried about negative equity and the risk that their children might inherit a debt they can’t afford to pay off.
There’s no need.
If you use an Equity Release Council member for your mortgage, you’ll benefit from a negative equity guarantee which means that, even if house prices fall, the worst case scenario is that your beneficiaries won’t inherit anything from your property.
Some lifetime mortgage products allow you to drawdown on your loan in smaller amounts to reduce the amount of interest that’s charged. If you only need a smaller, regular amount to support your other income this could reduce costs considerably.
Home reversion products are usually available only to people aged over 65.
Again, the older you are the more money you’ll get for your property. You could get anywhere from 20% to 60% of the market value of the property depending on age.
Which? quotes that a couple, aged 65 with a £250,000 home, can expect to get a £50,000 lump sum in exchange for between a 59 percent and 74 percent stake in the property.
With home reversion, you know that your beneficiaries will get something when you sell the remaining share of your home. No matter what happens to house prices in the future. Providing you’ve not sold 100% of your home, of course.
You’ll just not get the full amount of any increase in value. Only the share that you own.
You could also have an opportunity to take a second bite of the cherry with this type of equity release. Say you “sold” 50% at retirement; the option is there to go back to the provider to sell your remaining share in the future. This might be helpful to pay for care costs in later life for example.
With a lifetime mortgage this option may not exist, even if you’ve only borrowed against 50% of your property value.
Equity release contracts are very complex and are difficult to unravel if you change your mind. Early exit fees can also be onerous. You’ll therefore want to take independent financial advice to make sure it’s the right thing for you before proceeding.
Using equity release can also negatively affect your entitlement to certain benefits. You should look carefully at you’re bottom line position taking any loss of benefits into account.
It’s a requirement of the Equity Release Council that any member’s products are portable. In other words you can move your product from one home to another. However, that doesn’t mean that moving is easy. If you think you’ll want to move in the near future, you should consider doing so before taking advantage of equity release.
So, if you’re not expecting to receive enough income from your pensions to live comfortably in retirement, releasing some of the equity you’ve built up in your home might be a good way to give your income a boost.
Please note that this article is for information only. Reeves Independent cannot provide advice on any equity release products. No action should therefore be taken on the information provided in this article.
I hope this helps you understand how equity release works. Have you used equity release? Are you thinking about it? Let me know your experiences, good and bad. Just comment in the box below.