Equity Release – Should A Property Be Your Pension?

You might be keen to retire early with all sorts of plans for a new lifestyle. But the fear of not having enough money is holding you back.

However, if you’re a homeowner, aged 55 years and above, you could consider unlocking the equity tied up in your property to fund your early retirement. Equity release offers one way of providing the funds to bridge the gap until you get your state pension.

Different options

A lifetime mortgage is one type of equity release which is a long-term loan secured on your home. This is usually repaid from the sale of the property when you die or go into long-term care. Up to that point, you still own your home and won’t need to move out. Another option as part of this is a drawdown. This reduces the amount of interest you pay over the longer term. You take an initial lump sum and hold the remaining funds in a reserve pot to ‘drawdown’ as you need. This means you only accrue interest on the initial lump sum plus on any additional funds you draw down in the future. You’re not paying interest on money you’re not spending.

You can usually borrow between 18 per cent and 50 per cent of the property’s total value, and the older you are, the more you can release.

Home reversion schemes are another form of equity release. These involve selling a percentage of your property in return for either a cash lump sum, a fixed income for the rest of your life, or a combination of both. It’s a guaranteed lifetime lease that entitles you to live in the property rent-free for as long as you wish. .

Pros and cons

Equity release is not for everyone. It’s important to consider all the implications to make sure using your home as your pension is the right path for you.

Advantages

1)  Taps into the value of your home – access your property’s equity without having to sell or downsize. That way you can supplement your retirement income, cover healthcare expenses and follow your retirement dreams. You have the flexibility to use the funds just as you wish.

2)  No monthly repayments – unlike more traditional loans, equity release plans do not require you to make monthly repayments while you are living in the property. This can lessen the financial strain if you’re on a fixed income. You just need to remember that if you decide not to make payments towards the equity release, the amount you owe will increase over time.

3) Tax-free proceeds – the proceeds from equity release are usually tax-free so you can maximise the benefits without incurring any additional tax liabilities. This also means as long as you keep your annual earnings under £12,570, you could still take up some part-time work after retiring early, without being liable for any income tax.

4) Security of home ownership – by taking out a lifetime mortgage on your property, you access the equity but still keep the ownership and occupancy rights. This means you can continue to live in your home with total peace of mind.

5) No impact on pension entitlements – equity release isn’t a means-tested benefit, so it won’t affect your eligibility for the State Pension. Nor will it have any impact on your private pension. You just need to be aware that if you claim Pension Credit, it could affect the Guarantee Credit.

6) Certainty of remaining capital – with a home reversion plan, you know what the maximum proportion of the value of your home you are giving up is, up front. This means that you know that not all of the equity is swallowed up in interest charges. This doesn’t however prevent the remaining capital value being used to fund care.

Disadvantages

1) Interest accumulates – when you release equity with a lifetime mortgage, interest is charged to the loan and to any interest already added, i.e. compound interest. So, although you’re not required to make any repayments, the amount can build up significantly over time, if you don’t make any to cover the interest.

2) Property valuation risks – The value of property can fluctuate over time due to market conditions, economic factors, and property-specific variables. If house prices drop, it could reduce the amount of equity available for release or affect the loan-to-value ratio. Most plans have a ‘no negative equity guarantee’ however which means you cannot owe more than the value of your home and no debt will be left to the estate.

3) Early repayment charges – some equity release plans may impose early repayment charges if you pay back the loan before a specified period. It’s important to review the terms and conditions carefully to spot any potential penalties.

4) Impact on inheritance – using property as a source of equity release can reduce the value of the estate passed on to your family. Consider the implications of lessening your beneficiaries’ inheritance and discuss your plans with family members. But there are some plans these days which allow you to ring-fence a fixed percentage of your home’s value for your estate. If you have taken a home reversion plan and die not long after, this value of what was given up entering the reversion plan is not adjusted and so is lost permanently.

5) Loan-to-value limits – equity release providers often impose loan-to-value limits based on factors such as age, property value and health. These limits may restrict the amount of equity that can be released from your home, potentially reducing the funds available for your retirement plans.

Next steps

Equity release is an effective way to unlock the value of your home, provide a supplement to your pension and enable you to follow your retirement dreams. But it is a major step and one that should not be taken lightly.

Explore other alternatives first such as downsizing, renting out one or more rooms or accessing your savings. Seek professional financial advice to see if equity release sits well with the rest of your long-term financial goals. And make sure you’ve got all the information you need to come to an informed decision.

Please don’t hesitate to contact a member of our team if you’d like to find out more about equity release.