Equity release explained
Equity release allows you to release the value you have in your property. Falling annuity rates caused by a number of factors from gilt rates to the fact we are all living longer has left many looking for alternative ways to fund retirement. Equity release isn’t an option which should be taken lightly and should be considered with family members who are potentially in line for an inheritance.
Equity release did get something of a bad reputation around the financial crisis in 2007. Families were releasing some of the value of their property without fully understanding the implication or complications this could have on their death. Anyone who was expecting the full inheritance of a properties value got quite a shock when a reduced amount was paid to them. The market for equity release started out with door to door salesmen but with the introduction of some larger, more trusted and reputable companies confidence grew.
Before you enter into such an arrangement it’s important to fully understand the different type of equity release available and how they work.
There are two main product on the market right now
Home reversion schemes
These work by selling a percentage of your property to the provider for less than present market value. You are allowed to stay in your property for the rest of your life, or if you move into residential care. At this point the property is sold and the provider would receive the same percentage you agreed at the outset. So for example if you agreed 30% with the provider they would receive this value on sale. Obviously by them marking down your property at the outset, before releasing 30% to you in cash, they would profit from a future sale, if the property had increased in value.
You can only usually take out a home reversion scheme from the age of 65, however, just with enhanced annuities, certain lifestyle habits or medical conditions can be taken into consideration to work in your favour.
A lifetime mortgage allows you to borrow a proportion of your homes value without paying back the interest during your lifetime. The interest is rolled up and then taken from the remaining value of your property on death or if you moved. The longer you live the less your estate would receive from any subsequent house sale.
The number of providers offering equity release plans has fallen over the last few years since the financial crisis, partly due the the flat housing market. If there isn’t going to be any significant increase in the value of a property, especially for Home reversion schemes, providers profits are greatly reduced.
However, as earlier stated, retirement is becoming harder to fund every day. Increased inflation, low interest rates on savings, stock-markets depleting pension fund values due to the global economic crisis and historic low annuity rates. Many have the view that you can’t take your property, or its value with you so why suffer a lower standard of living in retirement. It has become a serious consideration for many over the last few years. Being a relatively new financial product it’s still in the bedding in stage for people to consider it as part of their retirement income. Always speak to a financial adviser who specialises in this area before making any decisions.