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Life expectancy throughout the UK is a lot higher now than it was a decade ago. With that comes financial pressure, which is where equity release for pensioners can be your ultimate financial lifeline.
Equity release can be used by anyone aged 55 or over; however, it’s more accessible once you retire, own 100% of your home (no mortgage) and have sought financial advice to discover if this really is the most appropriate method to finance whatever you need to raise the capital for.
With equity release, pensioners are free to spend the money however they like. You can use it to buy your own forever home - outright if you have enough property valuation to do that - or you can help your kids or grandkids to get on the property ladder courtesy of the bank of mum and dad, which is the case for hundreds of thousands of children these days.
Did you know almost a third of the UK property market is tied up in pensioner wealth? Over £1.1 Trillion is the amount of money that UK pensioners are sitting on that’s tied up in their properties.
Due to the house price surge we’ve seen in the past couple of decades, the majority of pensioners are seeing substantial increases in their total property wealth, or asset wealth as your financial advisor would refer to this as. Equity release for pensioners is how to release the cash that’s tied up within your property.
For some, equity release is used to top up their pension incomes, whereas, for others, it’s to afford some retirement luxuries.
Those who leave things until they’re older, perhaps into their 70s or 80s, tend to be using equity release as a way to finance increasing living costs, perhaps make some home adaptations that are required such as installing a bathroom on the ground level, wheelchair access ramps or a stairlift.
Unlike traditional mortgages, there are no restrictions on what you can spend your money on. It’s your equity that you’ve paid into your home over so many years. Equity release lets you take that out of your property as a cash advance. You’re selling your home but retaining the right to live there for the rest of your life.
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Equity release for pensioners will have some costs attached to arrange the plans, then the final interest that’s payable upon the sale of your home. How much interest is charged depends on the type of equity release plan you take out. The fees upfront include an arrangement fee, which can vary from £700 to £3,000. There’s also a property valuation fee, although that’s sometimes included as part of the arrangement fees, solicitor fees and advisor fees.
Legal and advisory fees are variable. Some plans will contribute to your legal fees; others may have free advice available from an equity release advisor. Where advice is given for free, the advisor can be paid a fee from the plan provider, or it could be an investment firms’ own advisor. In the case where you aren’t using an independent financial advisor, it is worth asking if they cover the whole of market, or if they represent any particular providers.
Some are tied advisors meaning they can only refer you to certain providers whereas someone acting independently will be able to compare the whole of market to find the plan that best suits your circumstances. It is a requirement to obtain expert advice from a certified financial advisor before you can use equity release.
Financial Firms Favouring Later in Life Lending
In the past few years, lenders have adapted to increase the flexibility of borrowing for later in life finances. As a result, the lifetime mortgage market has become more competitive, and there are additional borrowing options now on the market that can help you with traditional home loan products, thus preventing you locking into a lifetime mortgage.
Equity release advisors advise on both equity release products and all other types of finance you’d be suitable for. It used to be that if you were borrowing into retirement, or once retired, equity release was your only option.
Things now are much different as more lenders are scrapping upper age limits due to statistics showing the money tied up in properties and over a half million pensioners over the age of 90 requiring financial assistance through later life borrowing.
If equity release is suitable, it doesn’t necessarily mean you need to take a cash lump sum from your equity and rely on that making do for the rest of your life.
Equity release providers often have protection elements available, such as offering downsize protection, inheritance guarantees and drawdown facilities letting pensioners restrict the amount of interest that will accrue, whereby they can leave a portion of the value of their home to beneficiaries of their estate.
The older you are into retirement; the better the interest rates and flexibility is available. Due to a rise in pensioners requiring additional borrowing into retirement, lenders introduced the retirement interest-only (RIO) mortgage. This type of finance is not classified as equity release, but it is an alternative that lets you pay off an existing mortgage that’s been on interest-only and continue to pay for that for life. The reason this was brought in as an alternative to equity release was to give homeowners an option to prevent compound interest rolling up to the extent it could wipe out a potential inheritance for your loved ones.
In situations where you have an interest-only mortgage that comes to an end in retirement, and you don’t meet the requirements to secure a remortgage, retirement interest-only mortgages may be a better option. RIO finance can be used to repay the capital owed on a mortgage and release some of the equity, provided your home has increased in value since you bought it. The only requirement that you may have problems with to access an RIO mortgage is when you don’t have sufficient income to pass the affordability assessment.
Like all traditional mortgage products, lenders must conduct an affordability assessment, in particular when you’re borrowing into retirement as pension plans may see you take a drop in income and have to adapt your lifestyle to live within a lower budget.
That is the case for many people once they retire as pension plans haven’t always lived up to expectations. If your pension pot isn’t providing the funds you need, equity release with a drawdown facility can be used as a pension top-up method.
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With regards to the type of plan that’d be most suitable, it’s beneficial to discuss the plans you have or had for inheritance with your financial advisor. If most of your wealth is tied up in your property, there will be an impact on what’s left for your loved ones.
Equity release providers do advise that you discuss equity release with your family because what you take out of your property wealth is what is coming out of your loved one’s inheritance.
There are ways to set aside a protected portion of your home equity.
Most types of equity release products apply compound interest. How much interest you pay depends on the capital the interest is applied to and the length of time the plan is in place for. As these are lifetime mortgages, the longer you live, the more expensive they become. That said, there is a No Negative Guarantee with lenders who are members of the Equity Release Council. The guarantee only applies to your loved ones not inheriting debt to repay interest accrued beyond your home’s value. It doesn’t guarantee there will be equity available to leave as part of your estate for your loved ones.
Certain types of equity release plans for pensioners looking to set aside some of their estate for their family can use drawdown. With these, the interest only applies to the cash taken, and not the funds left on reserve. The minimum withdrawal on a first advance is usually £10,000. Some firms do have higher minimum lump sums.
By using a drawdown facility, only the cash advanced to you accrues interest. You could be approved for £50,000, release £10,000, keeping £40,000 available for future borrowing if you need it and the interest would apply to the £10,000 you released. This can help keep the costs of interest down.
Another way to protect a portion of your home equity is with inheritance protection available with specialist lenders. Whatever portion of your home equity you’d like to protect, it needs to be under the LTV (loan to value) the lender will approve you for. The older you are, the higher LTVs are, and the lower the interest rates are too.
Equity release for pensioners receiving pension credits is more complicated as your pension credits is a means-tested benefit. That’s the same for any council tax benefit.
When you release a cash lump sum through an equity release plan, the money is tax-free, but it does impact your pension credits. The minimum on most plans you can release is £10,000, and when your savings rise above that, your pension credits will be affected as will council tax benefits. With council tax, when your savings are between £10,000 and £16,000, you can receive a discount, but once you have savings over £16,000, council tax benefit stops.
The pension service is similar; however, any savings above £10,000 is assumed you earn £1 for every £500 above £10,000, which pushes your income up, thus reducing the amount of pension credits you receive.
If you’re releasing a significant cash lump sum through equity release, it can mean you’d lose entitlement to pension credits and with that, all the additional perks that come with it. Additional savings with pension credit include free dental care, a free TV licence when you reach 75, the Warm Home Discount, grants for boiler care etc. When combined over the year and your council tax benefit entitlement, losing pension credits can cost you thousands for things you may need to pay for in the future that would be free, or discounted if you had pension credits.
Equity release products are highly regulated as they can have a significant impact on your finances and any inheritance from your estate. It’s for this reason; expert financial advice is required before you can apply for equity release at any age over 55.
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