Are you a homeowner and looking at retirement solutions such as equity release? If so, what are the basics that you should be aware of, and what does it mean for your future and your home?
Equity release is basically a way of releasing part or all of the increase in value that has built up in a property. People buying property in the 1980s will have seen the value of that property increase significantly in the period between then and now – indeed, the average house price in 1980 was just £22,676 and now stands at more than ten times that. This means that those who have recently finished paying off their mortgages are sitting on a significant amount of equity
The money released can be used for numerous purposes, including funding retirement. It can also be used to pay for holidays or home renovations or perhaps to fund a gift to children.
One of the most common queries about equity release is around the issue of moving house – with many homeowners unsure if taking out an equity release product means they have to stay in their current property forever.
Well, in fact, releasing equity doesn’t necessarily mean being tied to one property for good. Increased flexibility within the products available means that moving house is perfectly possible. Plans now exist which offer something called ‘downsizing protection’. This option allows the homeowner to repay the equity release plan in full and move to a cheaper property should the need arise, once the equity release plan has been in force for at least 5 years.
In addition to this, some providers give the option to ‘port’ the plan when you downsize. This is only available if the new property is of sufficient value for the provider to be able to have a loan of the same amount. If the property is not of sufficient value, there may be a need to pay off some of the borrowings early using the difference in the price between the two properties. The new property should also meet the providers’ standard lending criteria.
Equity Release Products
There are two main types of equity release products available – both of which are potentially sensible retirement solutions.
• Lifetime mortgage – This is essentially a long-term loan that uses the property as collateral. Interest on the amount released is rolled-up over the loan period and is usually repaid, together with the sum itself, when you die or if you go into a care home. You retain 100% ownership of the property and responsible for its maintenance with the right to remain there for the rest of your life.
• Home reversion – This type of plan involves selling a percentage (or all) of the property to the home reversion provider. In exchange for giving up a specified amount of the property, the equity release lender will then provide a lump sum, or regular payments. Again, the reversion provider guarantees a lifetime tenancy for the previous homeowners.