Did you know that most homeowners are considering equity release in 2024? According to a study by the Equity Release Council (ERC), 61% are interested in using the wealth tied up in their property to fund retirement. This figure is up from 57% three years ago.
Two primary drivers are behind this – a desire to fund later-life care and boost pension income. There is also a growing social acceptance of having a mortgage in retirement (rather than paying it off).
Below, our Carlisle financial advisers explain why equity release may not be the best choice for funding retirement, but rather a useful “backup” card to have in your hand. We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137`
e: [email protected]
What is equity release?
If you own a property (even with a mortgage), then it will be worth something. However, that wealth is not readily accessible. You cannot “spend” it, like savings in a cash account. Equity release offers a unique way to access the equity (“cash”) tied up in your home without selling it. There are two main options to do this:
Lifetime mortgage. A type of loan secured against the value of your home. This is eventually repaid when you die or go into care.
Home reversion. This involves selling your home (or part of it, such as 25%) for a cash lump sum. You can still live in the property, but the home reversion plan provider will own the specified share.
Why are people considering equity release?
At first glance, equity release appears an ideal solution. You can access the equity in your home without needing to move out. Some might assume it takes pressure away from needing to save into a pension. However, these assumptions can be risky (as we explain shortly).
Current trends suggest that lifetime mortgage products are rising in popularity relative to home reversion plans, especially in the South East and North West of England. The average amount borrowed in Q4 2023 was around £80,000.
The attraction of lifetime mortgages is the flexibility they can offer in retirement. They do not require monthly repayments (like traditional mortgages). Instead, these products allow the purchaser to access tax-free cash via a loan secured against their home.
What are the risks of equity release?
The simplest method of ‘releasing cash’ from your property is to sell it. If you sell your home – e.g. by downsizing – you get to keep the full value of the proceeds after fees and taxes are deducted. However, equity release involves borrowing money via a lifetime mortgage (which incurs interest on debt) or giving away an equity stake in your property. This means when it is eventually sold it is unlikely you will get to keep the full value.
These options also carry other risks which need careful consideration. A lifetime mortgage often involves a higher rate of interest than traditional mortgages. Over time, the compound interest can quickly escalate. By the time of your death, the inheritance you hope to bestow on your loved ones could be significantly eroded.
To mitigate this risk, an individual could make various interest payments to keep the debt under control (e.g. using a recently acquired inheritance). Another idea could be to take out multiple smaller lifetime mortgages over the years, perhaps during periods when interest rates are lower.
With equity release, you usually are not offered the market value of your home when a provider quotes the lump sum figure. A home reversion scheme can offer between 20% – 60% of the market value of your home. You also need to be wary of the possibility of your circumstances changing in the future. This can be very costly if you want to cancel a lifetime mortgage.
You also need to consider how events might unfold after your death. The property will likely need to be vacated quickly (e.g. within 30 days), which could be problematic for your executors.
How should I use equity release?
If you can fund your retirement lifestyle via other means, such as via pensions and ISAs, then equity release may not be the best (or first) option. Also, if you are open to downsizing, this could be a better way to release money from your home.
Of course, there are situations where equity release products can be useful (e.g. if your savings are low and/or you do not want to move home). However, you should consider discussing all your options with a financial adviser and solicitor before making big decisions.
This is why we recommend planning far ahead for retirement. For instance, making pension contributions early in your career allows your fund to benefit more from compound interest. When you later start thinking about retirement, the savings will help broaden your financial options.
Equity release can offer an immediate “boost” to your finances and the consequences may seem far away (and, therefore, unimportant). However, be careful to consider the big picture. Think about what your needs, goals, and situation might be in the future; and think about what inheritance you want to leave to your loved ones. Speak with a financial adviser if you are unsure about anything and want to understand your options.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.