Equity release: using your property as a pension
If you don’t want the hassles and stress of moving, or think that downsizing isn’t for you, then you might consider an equity release scheme.
If you are aged between, say, sixty and ninety-five and have a house with at least £60,000 of equity in it (the difference between the house’s value and any mortgage or loans still secured against it), then you can borrow against the value of your home and thus release some of your equity. This new debt is then usually repaid from the proceeds of selling your home after your death.
In essence, equity release falls into two categories. There are lifetime mortgages, which involve taking out a secured loan against your home and allowing the interest to roll up until your death. If you want to unlock the value of your home over a period in staged or ad hoc withdrawals,
you can opt for a variation known as a drawdown lifetime mortgage. By withdrawing capital only as and when you need it, your overall interest bill reduces.
The alternative is a home reversion scheme, whereby you sell a proportion of your home, say, 30%, in return for a lump sum, usually from a life insurance company.
However, there are a number of drawbacks with equity release, including arrangement and valuation fees and, more importantly, the interest rates on offer, which are usually considerably higher than the
Best Buy rates paid by homebuyers or remortgagers. What’s more, if you live a long time, these rates could compound up over decades, eating into your remaining equity and your family’s inheritance. For
this reason it is often sensible to discuss this with your family.
For example, a £50,000 loan at, say, 6% a year would grow to £160,357 over twenty years, or £287,175 over thirty years. Although lifetime mortgages offer a guarantee that the loan will never exceed the value of the property, equity release remains an expensive, inflexible and risky
gamble. The risks are increased further if you use the money to invest in the stock market, as you are borrowing to invest, known as gearing.
Unless you have a life-shortening illness and need a lump sum for immediate needs, equity release could prove to be a costly mistake. Indeed, this sector, known as “home income plans” blew up in the
Eighties and early Nineties, with pensioners losing hundreds of millions of pounds after borrowing against their homes and investing this capital in the stock market.
If you are interested in equity release and prefer this to raising a normal mortgage or remortgage against your home (which may be a cheaper and more flexible option), then contact a member of Safe Home
Income Plans (SHIP) at www.ship-ltd.org
Age Concern publishes a free guide to equity release, which you can order on 0800 009 966 or download from www.ageconcern.org.uk/AgeConcern/fs12.asp
DISCLAIMER
Any external products and services listed do not necessarily carry the endorsement of retirement-flat-living or imply a recommendation. retirement-flat-living.co.uk does not recommend any of the advertisers and cannot be held responsible for any work undertaken by or purchased from any advertiser on this site.
Whilst retirement-flat-living makes every effort to ensure that the articles included in the web site are accurate at the time of publication it is inevitable that, as time goes by and circumstances change, the articles may contain out of date information. Readers are strongly urged to check the content of these articles before taking any action that could have legal or financial consequences. retirement-flat-living shall not be liable for any loss, damage or inconvenience arising from inaccuracies.