If you own your own home, then you may be considering making the difficult decision to sell up to help make your retirement more financially comfortable. If you want to avoid the upheaval of a move and are keen to remain in your home, Equity Release could be the right solution for you.
Most of us dream of taking retirement and being free from the commitments of fulltime employment. Sadly, with people living longer, the costs of living rising and interest rates remaining low, many people are now finding retirement a financial struggle.
In this guide, you will learn:
As you get closer to retirement, you may, like thousands of people, face the prospect of your monthly income dropping after finishing full-time employment.
If you are making monthly payments towards existing mortgages, loans, car finance, and credit cards, would not making monthly payments towards them be helpful?
With an Equity Release plan, you could reduce your monthly outgoings by replacing your current finances with a plan that doesn't require any monthly payments. Instead, the monies owed to the lender would be paid from your estate after you have passed away, or move permanently into a care home.
With many of our clients saving hundreds of pounds per month on their cash-flow, retirement suddenly looks much more attractive.
If you have a pension which isn't providing enough income for you to enjoy retirement without financial restriction, then an Equity Release plan could be of great help. With Equity Release, not only can you release a lump sum of tax-free cash from your property, but you could also have access to smaller, more frequent amounts by using a reserve facility in a draw-down plan.
A draw-down Equity Release plan allows you to release a lump-sum up-front, and place a pre-agreed amount into a reserve facility for future use. The critical advantage of the reserve facility is that you are not charged interest for money held in reserve. Instead, you are only charged interest as and when you access the funds in the future.
By only paying interest on the money you have taken, you could save thousands of pounds over the lifetime of the plan.
You can think of a reserve a bit like a savings account which you can use to top up your income. Typically the minimum amount you can withdraw from your reserve is £2,000. Different plans have different rules, so it is best to check how any reserve works on any plan recommended to you.
Just like any equity release, the interest rate is fixed for life, and when requesting draw-downs, your lender will supply you with the latest interest for the additional money at the point of request.
Another benefit is that the lender would typically transfer you the money directly into your bank account within 14 days.
Although further equity release isn't required to access your reserve, we always suggest you speak with an adviser if you are thinking of releasing additional funds. There could be other cheaper plans available to you at the time, and speaking with an Equity Release advisor will be the best course of action.
We have already explored how Equity Release can help reduce your monthly outgoings, but it can also help create a monthly income for you. The first consideration is a draw-down plan, which could allow you access to money as and when you need it. But, there are also plans which will pay you a pre-agreed amount into your bank each month. These types of Equity Release could be perfect if you are finding yourself a few hundred pounds short each month.
Instead of using the monies received from Equity Release to pay your bills directly, you could also consider using it to create income from investments. A popular example is to purchase a buy-to-let property to provide you with monthly rental income. You can even use Equity Release on the buy-to-let property too.
You might also want to want to stop working your current job and start a business, which equity release could fund the set-up, or enabling you to volunteer while being financially stable.
If you have or are looking to stop work, but have debts, equity release could be an excellent option for you.
Equity release allows you to access a tax-free lump sum of money from your property, without the need for any monthly repayments. You can use these funds to repay any debts and enjoy your retirement to its fullest. Potentially by clearing debts, you could spend all your income on anything you wish, without mandatory monthly repayment obligations. The amount you owe to the equity release lender will be taken from your estate when the last borrower passes or moves to long-term care.
The most common debt that we see Equity Release used to repay is an existing mortgage, being either interest-only or repayment.
If the type of mortgage is interest-only, you are going to need a capital vehicle to be able to pay the balance outstanding when the term ends. We have seen countless times that people do not have sufficient vehicles in place and that they are forced to consider selling the property to repay the debt. Hopefully, with an Equity Release, you'll not only be able to clear your existing mortgage, but also allow you access to additional money to spend however you wish.
If you have a capital repayment mortgage, you may find that a large part of your income is spent on the monthly payment. You could decide to use Equity Release to clear your mortgage, boosting your cash flow by lowering your outgoings.
You might be aware that your pension pot is not part of your taxable estate concerning inheritance tax. People have started to realise that you can use equity release to fund your retirement as though it were a pension. By not withdrawing from your pension, you would expect future growth on the investment. The amount your pension pot could continue to grow by may even be more significant than the interest accumulating on your Equity Release plan. At the end of your life, you can repay your Equity Release from your estate, while your pension pot is protected, and can be passed down to your chosen beneficiary free of inheritance tax. We can work with your pension advisers, so you are getting both equity release, and pension advice at the same time.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial or pension advice and should not be relied upon.
Equity release is not right for everyone and may involve a lifetime mortgage or home reversion plan.
If you are considering Equity Release we recommend you read through is equity release right for me? carefully.
We have also created a Myth Buster for further useful reading.
Equity release can impact your entitlement to mean tested benefits and will impact the value of your estate.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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