British people need at least £260,000 to retire without money worries, says a recent report in The Independent. The plummet in interest rates and an increase in life expectancy have both had a considerable impact on the retirement sums. With less savings and the prospect of a lengthy retirement, retirees are pondering how to maintain the standard of living they have enjoyed whilst working.
It’s easy to see how many people have found themselves with a woeful shortfall in savings for old age. As a result, market forces have responded and equity release has become mainstream. It has become a lifeline to many looking to access wealth tied up in property.
Is equity release a good thing? The answer, unfortunately, isn’t straightforward. For some it is great, but for others it is not. There are two main forms of equity release and both have their pitfalls. This article gives a brief overview of the two types of equity release and takes a look at some of the pitfalls.
What is equity release?
Equity release is a financial arrangement to enable homeowners to access money tied up in property. If you own your own home you can release equity from your property through an equity release product. The two types of equity release are:
Lifetime mortgages – a mortgage secured against your property either with repayments or with interest rolling up
Home reversion plans – passes ownership of your home, or part ownership, to a home reversion provider, while you continue to live in it
If you are considering using equity release to access money, it is important to seek advice from an Independent Financial Adviser (IFA) with expertise in equity release products. Your IFA will review your circumstances with you, give impartial advice, explain the types of scheme and the possible consequences, including any pitfalls.
Here are six things you should know before committing to equity release.
Eligibility for state benefits
Equity release can affect state benefits and care funding. The main benefits affected are those that require means testing. The funds you take from your property through equity release is considered capital or income. Any capital or income is taken into account for the assessment of means-tested benefits. The main benefits affected are pension credit and council tax reduction.
If you opt for a home reversion plan, these forms of equity release will usually not give you anything near the true market value of your home. Find you more about home reversion plans here.
Early repayment fees
There may be early repayment fees if you change your mind or sell your property before you die or go into long-term care.
“One of the most expensive mistakes people make with equity release is to get caught out with an early repayment charge following poor financial advice. We recommend that anyone interested in equity release should ask their financial adviser for an explanation about the implications of early repayment fees and what exactly they could amount to.” (Reeves Financial)
Equity release is designed to run for the rest of your life. As the term may run for 30 years or more, it is quite conceivable that a change of circumstances could occur during this time. If you decide to sell your property and downsize after taking out an equity release plan, you could face a hefty early repayment fee. Certain Aviva equity release plans, for example, can charge as much as 25 per cent of the initial advance for early repayment.
The impact on other people
Taking out an equity release plan could leave your family with a much smaller inheritance from your property, particularly if you have taken out a home reversion plan or a lifetime mortgage with roll-up interest.
If you are considering equity release it is a good idea to discuss it with your close family members first. If you are using equity release to help a family member, such as for university fees, or to help one of your children or grandchildren get on the property ladder, they should be made aware that this could reduce their potential inheritance.
Depending on the equity release plan being arranged, you could pay anything between £1,500 and £3,000 in arrangement fees. Always check fees before you agree to a plan. You may have to pay your financial adviser, as well as the provider’s administration charges. In addition, you may have to pay for conveyancing and surveyor fees.
How much you borrow
According to Martin Lewis, founder of MoneySavingExpert.com, if you have decided equity release is right for you, it’s best to borrow as little as you need, and not necessarily all in one go. The sooner you borrow with equity release, the more expensive it is. Drawdown lifetime mortgages are a sensible option as they are set up to be able to take money out in increments.
Always ensure equity release is right for you before committing. It is a good idea to do some research to improve your understanding of equity release and how it will affect your financial future - The Money Advice Service is a good place to start. If you decide equity release is the best option to access capital, always seek impartial advice from an independent Financial Adviser before committing to a plan.