Making Use of Equity Release
Equity Release is a solution that is increasingly used by older people in the UK to provide them with money in their retirement. Different plans provide different methods of releasing money, and you have the option of taking the money as a cash lump sum or as income.
The reason why equity release UK is becoming so popular is that many people in retirement find that they live in a house that is worth a considerable amount of money and they wish to use this. These houses often have no outstanding mortgage. Their reasons for using money in their houses range from buying a new car or funding their travel whilst they are still physically fit, to paying off a loan or treating their children and grandchildren – and taking pleasure from the enjoyment they bring. There are numerous other purposes too.
Advantage of Equity Release
The key advantage of equity release is that it enables home-owners to tap in to the value of their property without any need to sell it or move out. This is an important issue for many elderly people who have lived in their homes for many years and have no desire to move out.
However, there are two issues that require careful consideration when taking out an equity release scheme:
- The impact that the money will have on means-tested state benefits you currently have.
- The effect on your estate of removing money from the home. This will result in a lower sum – or nothing at all – being passed on to your beneficiaries.
Having a comfortable retirement is something that everyone desires but few may actually achieve. In the last few decades, successive governments have realised that many people will not be able to realise a comfortable retirement because:
- People are living a lot longer and are having leading active lives in their retirement;
- Relatively small amounts are being saved by people in their pensions for retirement. The average pension pot is around £40,000.
This has led the Government to introduce Automatic Enrolment which is a system that makes employers and employees contribute to a pension. The idea behind this is to make people aware of providing for their retirement and to reduce people’s reliance on the state to provide for them in old age.
Currently, the old age pension is provided to retirees on a ‘Pay As You Go’ basis which means that it is funded by working people who contribute through National Insurance Contributions. As the demographics of the UK population shift from more people in work to less people in work and more people retired, there is no guarantee that the state will be able to provide a pension for all its pensioners.
Equity Release In Retirement
With pension savings still at a low level and people’s life expectancy increasing, there are few options available to people to fund their retirement. This is one of the reasons why equity release has risen in popularity over the past few years.
Many people have houses that are worth a considerable amount of money and which have little or no mortgage. These tend to be their biggest assets yet they are unable to release the money from them.
Using one of the popular equity release plans such as a lifetime mortgage or home reversion plan, people who are seeking to provide income or a cash lump sum can use their house. The main advantage with using an equity release product is that they do not have to move out of their house – this would be the case if they work to down size.
The amount of money that can be raised through an equity release plan is primarily dependent on two factors: the age of the people applying for the scheme and the value of their property. Where age is concerned, it is possible for two people to take out an equity release scheme and it will be the age of the younger of the two people that will apply.
Equity Release Schemes
The two most popular equity release schemes are a lifetime mortgage or a home reversion plan. For both of these schemes are regulated by the UK Financial Conduct Authority (FCA) and, therefore, representatives who are involved with advising these products have to be suitably qualified and authorised. This is an important thing to remember if you are considering any kind of equity release product – you must check to ensure that your adviser has the right qualifications in order to provide you with the appropriate advice.
Interest Only Equity Release For Retirement Income
Approaching retirement age is the time when many people start to consider how much money they will need to have a comfortable lifestyle. However, planning for retirement should begin many years before this.
Many people regard their homes as their primary asset and seek to release the money that is tied up in their property to help with their retirement. If you have your own property, you might want to consider an interest only equity release scheme.
Interest Only Lifetime Mortgages
Interest-Only Lifetime Mortgage schemes are only available for people who are aged over 55 years old – but many providers are more restrictive and offer them to people who are aged 60 or 65.
You must own your own home and occupy it as your main residence. In other words, you will be restricted if you try to take out an Interest Only Lifetime Mortgage for a Buy-To-Let property that you own, or home that might be used for holiday lettings, etc.
Your home must be valued at more than £70,000.
How Much Can You Borrow With An Interest Only Lifetime Mortgage?
The provider of your Interest Only Lifetime Mortgage will decide how much money they are prepared to lend you based on your age and the value of your property. This is the same principle that is used for other equity release schemes such as a Home Reversion Plan or traditional Lifetime Mortgage.
Once your Interest Only Lifetime Mortgage has been agreed and you have received your money, you will need to start making monthly payments which will be based on the interest on your loan. With conventional mortgages, your monthly payments would normally consist of capital repayment and interest payment. An Interest Only Lifetime Mortgage is different because you only pay the interest that has been charged on the capital that you have been loaned – you do not repay any of the capital. Therefore, you monthly payments should be relatively low but you should make sure you have the means to make the payments.
The interest rate that is applied to your loan will be fixed for life so you know precisely how much you need to pay each month.
When your home is sold, usually when you die or move into care, the capital element of the loan is repaid.