Equity Release in Retirement

Published:  29 Oct at 7 PM
In retirement we are often in the situation where we live in a property that has grown in value considerably over the years and may well be mortgage free, particularly considering the huge increase in property prices over the last 2 or 3 decades. Because of this increase, if you have lived in the same property for 10 or 20 years, even with the recent economic crisis you could have a mortgage-free asset worth well over £100,000. For many of us our home is our major asset, and with pension income possibly not keeping pace with general living expenditure increases, more and more people are looking at ways of releasing this locked up capital in their property.

Equity release is the term used to describe the ways you can do this to either provide a regular income and/or a lump sum.

There are two main types of equity release scheme. They are known as lifetime mortgages and home reversion schemes. With lifetime mortgages, the mortgage is repaid from the proceeds when you die or, for example, on moving into a nursing home. In the case of a home reversion you sell all, or a percentage of your home, to a third party and the lender will receive the relevant percentage value of the property when it is sold.

You can usually take a scheme in joint names so that it continues until the second death. If you release cash from your property you might give it to beneficiaries now, to be used for school fees for grandchildren, for example, or as a method of Inheritance Tax Planning. Alternatively, it may be invested as an annuity to provide a regular income for life.

Equity release schemes can be very helpful but are not suitable for everyone. It is important to understand the risks and to understand the cost, the level of flexibility (if you might want to move home) and the possible impact on future state benefits. Equity release is a very specialised type of loan and should be discussed in great detail with all those who may have an interest in the property before being entered into. You should also take professional advice. Equity release schemes can be very helpful but are not suitable for everyone. It is important to understand the risks and to understand the cost, the level of flexibility (if you might want to move home) and the possible impact on future state benefits.

The FSA (Financial Services Authority) produces a very useful Equity Release Guide which highlights things to consider such as whether the scheme has negative equity guarantee, so that if the value of your property decreases any outstanding debt after sale of your property won't be passed on to your next of kin. Another problem that it addresses is whether the lender will allow you to move home should you want to and the on-going responsibility for maintaining the property and the associated costs as well as the terms and conditions of leases for home reversion and under what conditions you could lose your home.

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