As you get close to retirement there are a lot of important financial decisions to be made. Among them is what to do with your home. One option you may have heard of is equity release. But what is an equity release scheme? Are there are any benefits of equity release? And is it right for you? This article is a short guide to equity release and whether it’s a good option for you.

What is equity release?

Equity release is a way to access the money tied up in your home without selling it. This can be a viable way to get extra cash during retirement because you can use the money for any purpose you choose, such as retirement planning or debt consolidation. In addition, with equity release, you don’t have to sell your home. Instead, you can still live in your home and receive a tax-free lump sum.

How does equity release work?

Equity release can be a mortgage or a loan. It’s based on the value of your home, which means that it is calculated by taking the market value of your house and subtracting any outstanding mortgages you may have already taken out against it.

To qualify for equity release, you must own your home; it is impossible to take out equity release on a property that you are renting or any property value you are still paying off.

What are the different types of equity release?

There are two types of equity release — lifetime mortgages and home reversion plans. Of course, the type you choose depends on your personal circumstances. Still, both can be used for similar purposes (such as getting a cash lump sum during retirement).

A lifetime mortgage is a loan that’s repaid when you die or go into long-term care. This type of equity release allows you to borrow a certain amount of money, which is then released in stages or all at once. You continue to own your home and pay the usual bills and rates, but you can borrow against the equity you have built up over time.

A home reversion plan allows for a lump-sum cash advance or monthly payments in exchange for selling part of your property to an investor. You can stay in the property for life, but ownership is shared between you and the investor until death when it’s sold off according to their contract.

This type of equity release allows you to access cash without selling your home. Still, it means that the value of your estate will be reduced by however much you sold off initially. For example, if you sold 50 per cent, only half would go back into your spouse’s name.

The benefits of equity release plans

There are many benefits to equity release. First, it allows you to access the cash tied up in your home without having to sell the property or take out a loan against it (which would require monthly repayments). You’ll never have to move home again if you don’t want because ownership remains yours until death or long-term care when it’s sold off according to their contract with you.

There are no monthly repayments with equity release because your loan is repaid upon death or long-term care. You also have the option of a lump sum payment if you wish. You can use this for any purpose, including retirement planning and debt consolidation. However, it’s generally recommended to seek advice from a financial adviser before taking out a loan.

What are the disadvantages of equity release?

There are some pitfalls of equity release — although it’s possible to mitigate many of them. For example, suppose you choose a lifetime mortgage. In that case, it’s essential to know that you will still have ongoing bills and rates to pay throughout your retirement. You may also need an inheritance tax plan in place as the amount you borrow will be included in your estate.

If you choose a home reversion plan, it’s important to remember that you are selling part of your property and, as such, the value of your estate is reduced. You also may not get as much money back from the sale as you expect (depending on how much you sold off).

Conclusion

Equity release can be a good tool for those over 55 who want to boost their retirement fund, make home improvements, or get a cash lump sum.

However, it’s essential to consider all aspects of an equity release plan before taking this step. For example, ensuring a “no negative equity” guarantee from the equity release lender.

Getting sound financial advice can help identify drawbacks like potential increases in interest rates and limits on who will take over the property if something happens (including death).

Please note:

• Equity release, lifetime mortgages & home reversion plans will reduce the value of your estate and can affect your eligibility for means tested benefits.