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Equity release as an option for raising retirement funds

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Are you looking for an alternative way to raise some retirement income? If you own your home and have enough equity to do so, equity release may be an option to boost your finances. But it is expensive and requires careful consideration.
 

What is equity release?

Equity release allows a homeowner over the age of 55 to draw cash from the value of their property while remaining in their home until they die or go into long-term care.

It’s an increasingly popular option, with more than 10,000 new customers releasing equity in the second half of 2013, according to trade body the Equity Release Council, but it can be high risk and needs careful consideration and independent financial advice. It says cash is most commonly used for extra income to meet everyday costs, as well as funding home improvements, gifts to family, holidays and buying a car.
 
There are two main types of equity release - a lifetime mortgage and a home reversion plan. Here we explain the basics.
Equity release is an increasingly popular option, with more than 10,000 new customers releasing equity in the second half of 2013 according to the Equity Release Council
 

Lifetime mortgage

Lifetime mortgages are the most popular type of product and involve taking a loan with no fixed repayment date and no monthly payments, which is secured on the property. Instead, interest on the loan is rolled up (or compounded) and repaid whenever the property is sold, which may be during the lifetime of the applicants, or on the death of the last to die. The borrowed amount is a percentage of the property’s value.
 
The debt increases over time, which may cost four times what you borrow after twenty years, according to figures from Which? For example, if you borrowed £10,000, this debt could become about £40,000 after twenty years.
 
The interest rate is usually fixed you should seek specialist advice from a qualified lifetime mortgage provider before considering this option.
 

Home reversion plan

A home reversion plan involves selling a percentage of your property to the equity release provider, often at substantially less than the market rate. You can stay in your home often rent-free for the rest of your life, although a nominal ‘peppercorn’ rent may be charged.
 
The percentage both you and the equity release provider own of the property always stays the same, regardless of property values. For example, if you sold 25% of your property to the provider, it would get 25% of the sale price. The overall cost of a home reversion plan therefore depends on how much your home increases in value.
 

What to look for

It is vital to get specialist financial and legal advice before taking out an equity release plan. You need to understand the long-term cost of the products, as well as any tax implications or impact on your benefits. You may also want to discuss the matter with your children, because it will mean they – or other beneficiaries – will receive less inheritance when you die.
 
As with any type of financial product, you should shop around for the best deal using an equity release broker. Look for members of the industry trade body, the Equity Release Council, as these adhere to a Code of Conduct that states all customers have the right to remain in their property for life (provided the property remains their main residence) and that no customer will ever owe more than the value of their home.
 

Are there alternatives?

The most obvious alternative to equity release is to downsize, if you have the equity to do so. While this allows you greater flexibility and may preserve some inheritance for your children, remember a sizeable chunk of your equity will be swallowed up in moving costs such as stamp duty, estate agent and solicitor fees.
 
If you are on a low income you should get a free Benefit Check from a charity such as Age UK or Citizens Advice as you may be missing out on various valuable benefits. If you are disabled and need the cash to fund work on your home, you may qualify for a grant from your local authority.
 

Getting it right

Michael and Frances Broadhead recently released £20,000 of equity from their £165,000 two bedroom bungalow in Spalding, Lincolnshire, with the option to release £28,000 more.
 
The couple used the money to fund a holiday to Mexico, make a gift to their two children, and put some into a rainy day savings account.
 
Mr Broadhead, 77, a retired sales and marketing director, says: “We thought about it carefully and discussed the matter with our children because it would be eroding their inheritance, but they were happy for us to go ahead. It’s given us a useful injection of cash while being able to stay in our home, so we’re happy with the decision.”
 
It’s given us a useful injection of cash while being able to stay in our home, so we’re happy with the decision
Michael Broadbent.
 
Mr Broadhead took retirement at the age of 60 but then set up his own business for 12 years. He finally fully retired at 72.
 
The couple decided to release equity from their home because they wanted to ensure their pension income was enough to cover the bills and they didn’t want to have to erode their savings, which was becoming the case until they went down the road of equity release. For them it has brought peace of mind and a freedom to enjoy life without having to worry about watching every penny.
 
To find out more about equity release, read this information from the Money Advice Service.
 
Have you released equity from your home? Why did you go down this road? Was it the right decision? Share your experiences with us below, or if you have any further questions on the subject please post them here and we’ll put it to our audience to see if they can answer them.
 
This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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