Equity Release: The Key to a Happy Retirement?

For many retired homeowners, using equity release to unlock the value hidden in the home can provide a source of extra money with which to enjoy retirement. However, it's vital to fully explore the details of equity release beforehand, as it forms a huge financial commitment.

With equity release plans you are able to receive either a tax-free, cash lump sum or a regular income, depending on the type of the plan, by releasing equity from your home. A big benefit of equity release is that you can spend the money on anything you choose. Many people who decide to avail themselves of equity release for instance buy a new car, add a conservatory onto their house or take a holiday of a lifetime.

But, apart from financing special treats for your retirement years, the extra money can of course also be useful to fund medical needs or alterations to your property to enable you to stay in the home you love for life.

An important point to consider, however, is that equity release is a lifetime commitment and once you have taken out a plan it may be difficult and costly to change your mind. As such, you need to be absolutely sure of what you are doing and your obligations and commitments before you go ahead. Furthermore, equity release will reduce the value of your estate and therefore the inheritance of your family and beneficiaries, so experts recommend that you involve your family when you are making your decision. In order to grasp all the features and risks of an equity release plan, it’s best to seek independent specialist advice.

To qualify for equity release, there are some criteria which need to be met. Firstly, both you and your partner should be aged 55 or older; secondly, your property must be valued to at least £70,000; thirdly, you should have little or no outstanding mortgage - any money released through equity release will first be used to clear any outstanding mortgage balance; finally, your property should be of standard construction.

There are different types of equity release plans available - Lifetime Mortgages, Drawdown plans and Home Reversion plans - and each comes with its own pros and cons. Your professional adviser can provide all the details you need to make a decision.

With a lifetime mortgage, a loan is secured against your property to provide you with a tax free cash lump sum or regular income to spend as you wish, typically with no monthly repayments to make. Interest is rolled up at a fixed or variable rate each month and is then added to the loan until it is repaid. This is usually when the home is finally sold.

The drawdown plan option is a variation on the standard lifetime mortgage. However, instead of taking all the money available to you in one lump sum, you take instalments as and when you wish - only paying interest on the amount you have drawn down. With a reversion plan you sell all or part of your home to a reversion company in exchange for a guaranteed lifetime lease and tax free cash lump sum. You do not typically receive the full market value of the share of the property you sell because the provider gives you the right to remain living in your home typically rent free, for the rest of your life.

However, as with any financial decision it is important to explore every option before making a decision. A good independent financial adviser will be able to provide help and advice on the best option to take for your needs.

About the Author

Matthew Pressman is a freelance writer and frequent flyer. When not travelling, he enjoys golf and fishing.