The UK’s mortgage market is currently worth a staggering £1.3tn, and 2016 saw borrowing increase by 11% from the year before. Part of this has been attributed to the growing popularity of equity release mortgages, which is tipped to grow into a £20bn market.
With approximately £1.7tn of the country’s finances tied up in property owned by the over 65s, and with an uncertain financial forecast looming, it seems that the older generation is finally cashing in on their rainy-day investments.
Equity release is nothing new. It saw a brief boom in the 1980s, but the costs were prohibitive and contracts were often structured so the borrower would inevitably end up in negative equity. This could lead to homes being repossessed, or significant debt being passed to family members. Learning from past mistakes, the industry and its products are now heavily regulated, and lenders consciously make an effort to explain every risk to their clients.
Equity release provides borrowers with a lump sum or regular payments over the rest of their life, in exchange for a percentage of their home. They are entitled to retain occupation of the property for as long as they wish, and the interest is compounded, or “rolled up”, to be paid upon the sale of the house.
Motives for choosing equity release are complex and many. One likely reason is the current gap between pension values and the actual costs of retirees maintaining a similar lifestyle to the one they enjoyed during employment. The money may also be used to pay off debts, like interest-only mortgages, and can be used as a way to stay in a family home without downsizing.
Older borrowers may also look to equity release as a way of reducing the inheritance tax on their property upon their death. The sum from the equity release may be given to relatives instead, and will not be subject to the tax as long as the borrower lives for seven years after the gift is given.
The technicalities and implications of using equity release are complex, and should always be explained by a qualified, independent equity release specialist (look for members of the Equity Release Council), and a solicitor.
While some homeowners find that releasing some of the equity of their home allows them to be more comfortable financially, it is not the best option for everyone. Taking out an equity release plan is a big decision, and could affect your loved ones after you pass. Here are eight recommendations about what to consider before releasing equity:
1. Do your research, and make sure you fully understand the implications of equity release. This includes the money available to you, and the process after your death. The Money Advice Service offers unbiased advice, and the Equity Release Council provides specific details about equity release.
2. Create a long-term budget to help you calculate your current income needs, and to determine how they might increase or decrease in the coming years. Will you finish making repayments on another loan, reducing your income requirements?
3. Understand the types of equity release plan, and which may be most beneficial to you. Make an appointment with an equity release specialist, like John Whyte in Sussex, to explain the difference between plans and how they will work with your lifestyle.
4. Speak to your family about your plans to release the equity of your home, and listen to their feedback. However, don’t take their opinions or concerns about equity release at face value; the legislation may have changed and each circumstance is different. Your adviser will be able to tell you the facts.
5. You should also seek independent legal advice, and go through your options with a solicitor. They will make sure you are completely happy with your decision, and fully understand the plan you are choosing.
6. Pay attention to the figures. A low-interest plan may be the most beneficial option to you, but consider alternatives, like plans which allow you to make monthly repayments to reduce the amount of interest rolling up.
7. Are you eligible for state benefits, or will you be in the future? Equity release may affect these benefits and alter your tax position. Talk to an independent advisor about how these may change your situation.
8. Consider the alternatives to equity release, like downsizing your home, asking your family for help or renting out any extra space you may have. If you are releasing equity to pay for an interest-only mortgage, speak to your lender about the alternative plans they can offer.
With the equity release sector set to boom in coming years, arranging a plan to suit your lifestyle will become easier than ever. However, don’t rush your decision, and remember you have a number of options available when planning for your retirement.
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