With property values having risen over the long-term, equity release can give older homeowners the chance to cash in on the value of their home, rather than just seeing it building up on a paper statement.
Despite the recent Bank of England raise, interest rates remain historically low and freeing up cash by borrowing against the equity in your home, and clearing your mortgage, is an increasingly popular way for older homeowners to boost their retirement pot.
Why do people use equity release?
They may have a significant amount of equity in the home they own, which they could free up to help pay off debts, top up their pensions, fund large payments and give them a higher standard of living in retirement, without needing to make monthly repayments.
So far in 2017, 39% of Responsible Equity Release customers who have released equity said that paying off mortgage or debt was the main reason they did so. In doing so, they released an average initial tax-free lump sum of £102,078.
People use equity release to fund holidays, cruises, home improvements and family events, but in using it to clear an existing mortgage, UK homeowners can free themselves from the drain of required monthly repayments, helping to fund their retirement.
Steve Wilkie, managing director of equity release specialists Responsible Equity Release adds:
“Years of rising house prices and mortgage repayments have helped UK homeowners build up equity in their homes – wealth that could now be used to free themselves from the drain of monthly repayments. They use the proceeds from a Lifetime Mortgage to repay their existing mortgage, all in one transaction.”
Why are more people carrying debt into retirement nowadays?
More and more homeowners are carrying debt into retirement, paying off mortgages or other debts. Many of us now expect to retire in debt - we’re buying homes later in life and building up years of credit card and student loan debt. For those on the cusp of retirement, low interest rates, underperforming pension funds and the rising cost of living make for financial challenges.
What types of equity release are there?
There are two main types of equity release schemes; lifetime mortgages and home reversion plans. It’s always worth noting that releasing some of the equity from your property may reduce the value of your estate over time, and could affect your eligibility for means-tested state benefits.
Lifetime mortgages - minimum age 55
With a lifetime mortgage you take out a long-term loan taken out against your home, with interest charged on what you’ve borrowed, and it’s covered by the eventual sale of the home. Most lifetime mortgages have fixed interest rates, or if not, they usually have a fixed cap they can’t go over, and there is a no negative equity guarantee that fixes the loan amount even if house prices go down, so it can’t be sold at a loss.
Home reversion plans - minimum age 65
With a home reversion plan you sell all or part of your home and get lump-sum or regular payments, and are able to live there usually rent-free. The amount you receive might be less than full market value, as the buyer is unable to sell it until you die or move into long-term care.
3 tips for using equity release to clear a mortgage
Steve Wilkie of Responsible Equity Release told us there are three things to consider:
- You must be able to pay off any current mortgage or debt secured against the property on completion – either with the proceeds of the lifetime mortgage or other savings you may have.
- With a lifetime mortgage there are no required monthly repayments, but some plans do allow you to make regular repayments to mitigate the build-up of interest and the size of the loan.
- Get expert advice and think carefully before securing other debts against your home as by consolidating your debts into a mortgage you may be required to pay more over the entire term than you would with your existing debt.
Is equity release the right option for you? Find out how much tax-free cash you could release with the Telegraph’s easy instant equity release calculator.