Being able to enjoy the cash tied up in your home sounds like a great idea, especially in retirement. But is it the best option for you, and is the time right to use that equity?
Equity is the market value of a property, less any outstanding claims against it. Basically, what you could sell the house for minus any remaining mortgage or loan.
When you work hard to pay a mortgage it’s not unusual to reach retirement and think about cashing in. Why not enjoy some of the value held in your home? This is especially true if the pension income you receive is not as much as you had hoped for.
Selling up sounds drastic, as does downsizing. It’s all a lot of fuss. It’s an emotional decision and the last thing you want to consider when you have found somewhere to settle.
Could you sell up?
The UK’s housing market boomed after the 1980s and the house you live in has probably soared in value. The big question is how can you access some of that capital growth and remain where you are?
Equity release is a way to improve the cash you have available. As with most things in life, there are choices to be made. You can release equity by taking out a lifetime mortgage, or by using a home reversion plan.
A lifetime mortgage sounds daunting. As you approach retirement you have probably only finished paying your original mortgage a few years earlier.
However, accessing locked-in money is on the rise. In 2017, according to the Equity Release Council, a staggering £3.06bn was “unlocked” by homeowners keen to make use of some of their home’s value.
To achieve this, a lifetime mortgage means accessing a percentage of the home’s value but retaining ownership. You borrow against the value of the house. The amount you can borrow will depend upon your age and how much your house is worth.
You can choose to receive a lump sum, or draw down income over time. You can make interest-only payments on the mortgage, or agree to settle the full amount (including interest) when you die or go into long-term care.
It’s vital to take independent financial advice first. Depending how long you live, the amount owed when settled could be more than the value of the property. This could have implications for your family or anyone in your will.
Home reversion plan
Unlike a mortgage, a home reversion is when you agree to sell part or all of your home. You will be able to live rent-free until you die or go into long-term care. It is not a loan, you do not pay interest, but it is classed as a high risk option.
When you choose a home reversion you receive a percentage of the value of your home. This suits older applicants because they are likely to get a higher valuation as the home reversion company is taking less risk and knows it will get its money back sooner.
This option suits some people who want to remain in their home, possibly receiving some form of care at home as they get older. As with a lifetime mortgage, it could affect benefits, tax and inheritance.
Get independent financial advice
Equity release is a complex subject and has many implications. It is important to take professional independent advice before making any decisions relating to your personal and family finances.
You should consider whether extracting cash from your home will affect any benefit entitlements. Also, how will it impact on your family’s income tax and, further down the line, any inheritance tax thresholds?
Logic Wealth Planning has advised on mortgages, estates and retirement planning for many years. We have helped families to avoid pitfalls and make the best investment decisions that fit their lifestyles.
Ultimately, we’re here to help.
Call us on 0808 1234 321 or email firstname.lastname@example.org if you’d like to discuss the possibility of using equity release to increase your options during retirement…