How Can Equity Release Help You Enjoy Your Retirement?

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There is an age-old expression that you can’t take your money with you when you die. For many people using Equity Release, this expression rings true, and Equity Release can be an excellent way of freeing up money later in life.

What is Equity Release? Is it suitable for everyone and are there risks involved? This article explains how Equity Release works, pitfalls to avoid and how you can use it to free up capital.

Let’s discover more about Equity Release.

What is Equity Release?

Equity Release is a specialised mortgage product offered to people aged 55 and over. A lender will allow you to borrow money against your property without monthly repayments.

There are two types of Equity Release available in the UK, Lifetime Mortgages and Home Reversion Plans.

Lifetime Mortgages

With a Lifetime Mortgage a lender will allow you to borrow money against the equity you hold in your property. Typically, you can borrow up to 50% of the equity you hold, although lenders have different thresholds largely based on your age and the value of the property.

The loan is repaid when you pass away or go into long-term care. The mortgage can be settled by the lender selling the property or your next of kin paying the outstanding balance.

Home Reversion Plans

Home Reversion Plans work in a different way but can achieve the same borrowing as Lifetime Mortgages. Instead of borrowing the money from a lender, a Home Reversion Plan allows you to sell a portion of your property to a provider. You are still borrowing money though because you won’t pay rent to the provider.

A Home Reversion Plan is ordinarily much less competitive than a Lifetime Mortgage because lenders undervalue the portion of the property they buy. For example, a provider may offer 25%-30% of the actual equity value.

Which Equity Release Product is Best?

There is no golden rule with any financial product and for some borrowers, a Home Reversion Plan will be better than a Lifetime Mortgage. Currently, Lifetime Mortgages are the most popular form of Equity Release with over 95% of UK Equity Release borrowers opting to use them.

Equity Release is a specialist product, and you are required to consult with an adviser before taking it. Your adviser will consult you about the various options and products available to you and match your personal situation with the right Equity Release product. However, an equity release broker should always explore all mortgage options before recommending an Equity Release product.

How Does Equity Release Work?

To obtain Equity Release you first need to speak to an Equity Release adviser. They will check that you qualify for Equity Release and advise you on how to proceed.

To be eligible for Equity Release you must be:

  • Aged 55 or over
  • The owner of all or most of your property
  • Mortgaging a property that meets a lender’s requirements and typically over the value of £70,000.

Once you have selected your product the lender will release the funds to you subject to undertaking a valuation. You can opt to have this money paid as a cash lump-sum, regular payments or even a combination of both.

Equity Release is also available when purchasing a property and the criteria is broadly similar to an Equity Release remortgage.

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Is Equity Release Tax Free?

Yes, Equity Release is tax-free in most cases. In exceptional situations, you may find an additional income tax liability if you are a high net worth individual.

Once you receive the money you are free to spend it however you choose to, as long as it is for legal purposes. Even though the lender needs to be informed of the capital raising purpose, to ensure that it is legal and does not damage the security property, lifetime mortgage lenders are far more flexible than traditional lenders for capital raising.

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What Can Equity Release Be Used For?

As mentioned above, you can choose how to spend the money. Unlike traditional mortgage applications, an Equity Release lender will be far less strict.

This ability to spend the money in any legal means makes Equity Release the most flexible mortgage product in this respect.

Top Up Your Pension

Over our lifetimes, we contribute to pension pots in the hope it will cover costs when we retire. Pensions can be tricky to manage though, and you may find shortfalls in your pension when you retire.

For example, at times of high inflation like we are experiencing now, that value of your monthly pension payment is diminished. You can use your Equity Release payment to top up your pension pot or invest it elsewhere.

Be aware, taxation may occur if you invest your Equity Release funds so you should consult with an accountant or your pension adviser before taking this route.

Repay Debt

The last thing we want in life is to retire with outstanding debt. Debt is extremely stressful for most people earning a full-time wage, and this stress can be exacerbated with limited pension income.

Equity Release allows you to settle debt and concentrate on enjoying your life without a financial dark cloud hanging over you.

Equity Release itself is a loan, so before committing to an Equity Release product to settle debt, discuss your situation in full with your adviser. It may be best to use other means such as savings to repay debt rather than take Equity Release.

Reduce Monthly Outgoings

With the ongoing cost-of-living crisis, any additional money to pay bills is welcome. You can take your Equity Release as a regular monthly payment to help manage your month-to-month expenses.

Cruises and Holidays

Retirement presents opportunities to people who have financial means. Exploring far-flung places you missed out on in your youth and taking that holiday of a lifetime.

You can use the funds from Equity Release to enjoy your retirement and travel on cruises and holidays you might not have been able to afford otherwise.

Luxury Purchases

Alongside vacations, a growing number of people who take Equity Release are opting to make luxury purchases. The car you always dreamed of owning or top of range golf clubs many become accessible through Equity Release.

Speak to a Specialist

With any financial commitment there are always risks involved. Some of these risks are erroneously swept under the carpet because borrowers feel they will be dead and will avoid the consequences of their actions.

Your next of kin will have to resolve the Equity Release product when you pass away, and you may be putting undue financial burden on them by taking an Equity Release product. It is vital that you consult with a specialist adviser and weigh up the various options available to you before committing to an Equity Release product.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee free Equity Release advice and arrangement.

Contact Boon Brokers to book a no obligation Equity Release consultation today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.