Since the start of the Coronavirus crisis, more than 9.3 million people in the UK have been forced to take a leave of absence from work and over half a million have lost their jobs.
If you are one of the many who have been directly affected by widespread layoffs and company cut-backs, your finances are likely to have taken a hit. This can be difficult at any time but maybe especially worrying if you are approaching retirement.
According to a survey by Fidelity, over 61% of people have seen their retirement investments fall since the beginning of 2020. In short, it’s a very unfortunate time to be approaching retirement: pockets are pinched, jobs are scarce and investments- the lifeblood of private pensions- are under-performing across markets.
Though most of us have little power to shape the economic outlook of the UK in the post-Coronavirus era, you may be able to regain some control over your personal finances and retirement outlook through the use of equity release.
If you are a homeowner, an equity release plan could help you cash in on your bricks-and-mortar investment by borrowing from your property’s value to top up your income.
What Is Equity Release?
Equity release allows homeowners over the age of 55 to borrow money from the value of their property. The cash is released as a tax-free lump sum or as a steady stream of income, depending on your personal needs.
You don’t make any repayments on the debt and continue to live in your home. Because you don’t make any repayments on the loan, the interest on equity release borrowing can mount up quickly.
However, if you borrow with a regulated lender, you will never owe more than your home is worth.
The debt, plus any interest, is paid back when you die or move into long-term care.
How Does It Work?
There are two types of equity release scheme available in the UK: lifetime mortgages and home reversion plans. The minimum age for a lifetime mortgage is 55, and 65 years old for a home reversion plan.
A lifetime mortgage is a loan with a fixed interest rate which is secured against your home. Unlike a regular mortgage, you don’t make any repayments. Instead, interest is added to the money you borrowed, which is paid back in full when you die or move into long-term care using funds from the sale of your house.
When you take out a lifetime mortgage, you can choose to withdraw all the equity at once in a lump sum, or withdraw smaller amounts as you need them, in a ‘drawdown’ plan.
Home Reversion Plan
In a home reversion plan, a lender buys a share in your property at a below-market price, while you continue to live in your home as normal. When you die or move into long-term care, the lender recovers its investment through the sale of your home.
You can choose whether to release the equity in one lump sum or to receive a regular stream of smaller payouts from your lender.
How Much Does It Cost?
Equity release can be quite an expensive way to borrow. That does not mean it is necessarily a bad idea, but it is important to understand the costs and benefits to decide whether equity release is right for you.
In a lifetime mortgage, you don’t make any repayments on your loan while you are alive. This means that the interest on the loan compounds on an ever-increasing total, and so mounts up very quickly compared to a repayment loan.
For example, £60,000 in equity borrowed over ten years at 5% would result in a lump sum of £98,820 to be repaid from your estate when you die.
This debt roll-up is one of the major drawbacks of equity release. However, it is possible to minimize the impact of compound interest: making payments on the loan interest while you are still alive or reducing the amount you borrow is a couple of ways to avoid this debt roll-up.
Use Equity Release to Help With a Drop in Income
Pay Off Your Mortgage
If your income has recently been reduced, you may find yourself struggling to keep up with outgoings that stretch your budget more than they did before. It is easy to cut back on luxuries, such as gym memberships and holiday. However, some outgoings, such as mortgages, cannot be avoided without very serious consequences.
When you release equity on your home, you are obliged to first pay off any outstanding debt on your current mortgage. This is to ensure that there is only one creditor with a claim to the property and helps prevent disagreements further down the line.
As a result, when you release equity, you won’t have to make any more mortgage payments. This immediately frees up some of your monthly income, which you can put towards other expenses instead.
Top Up or Replace Your Monthly Income
If you have experienced a fall in income, either due to being furloughed or having lost your job, you are probably looking for ways to replace the lost funds.
Equity release could be one way to stabilize your finances, by providing access to a large pool of money using your home.
When you take out a lifetime mortgage, you have the option of releasing funds in a single lump sum, or by setting up a ‘drawdown’ facility. A drawdown facility allows you to withdraw smaller amounts from your home over regular periods of time- a bit like a salary.
One benefit of this is that you don’t take out all of your debt at once, meaning that the interest on your equity release has less time to build up.
Depending on how much equity you have in your home, you may be able to replace your monthly salary.
For example, a person who is 65 years old with a home worth £350,000 and £20,000 left on the mortgage could potentially access up to £140,000 equity, according to StepChange debt charity.
This is enough to pay almost a full-time £29,000 salary (the UK average) for almost five years.
Spruce Up Your Home
Thousands of people have taken early retirement in the wake of the Coronavirus crisis, and many millions more have been forced to spend much longer cooped up at home than they normally would.
As a result, you may find yourself thinking more about ways to improve your home and make it a more comfortable place to spend your time. This could involve making adjustments to your property in order to make it more accessible, or simply revamping the décor to freshen things up.
Either way, equity release can provide you with the cash funds to take on home improvement projects so that you can make the most of the property you have and make it a more pleasant place to spend your time.
Equity Release Considerations
As with all major financial decisions, it is important not to rush into equity release without thinking carefully about your options.
It can be very expensive to leave an equity release plan before the end of the term- some lenders may charge up to 25% of the total borrowed if you want to move house or get your money back.
If you are seriously considering taking out a plan, you may wish to speak to an independent advisor about your options to make sure it is right for you.
In the right circumstances, equity release can provide a financial lifeline which has the potential to greatly improve quality of life in retirement.
Equity Release Pros and Cons
|No need to sacrifice your quality of life despite a change in circumstances||Eats into potential inheritance for family|
|Replace the income lost when you left work or retired||Expensive if you change your mind|
|Tide yourself through a difficult period without taking on the burden of additional loan repayments|
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.