While potentially struggling to cover general living expenses, many of the so-called baby boomers may have paid off their mortgage and find themselves sitting on a relatively valuable asset, their home. Consequently, there has been growing interest in equity release, but there are several pros and cons to consider before taking action.
Two types of equity release
For those approaching/in retirement, there are typically two primary sources of equity release:-
- Lifetime mortgages
- Home reversion plans
Before we look into the individual pros and cons of these options, there are some general points about equity release to review:-
General advantages
- Access funds without selling your home
- No monthly repayment
- Continue to live in the house
- Option of regular or lump sum income
- Useful for covering income shortfalls
General disadvantages
- Reduced inheritance for beneficiaries
- Valuation can be submarket
- There may be interest payments
- Upon death, the property will be sold relatively promptly
- Can impact eligibility for means-tested benefits
While a lifetime mortgage and a home reversion plan will release equity from your home, they are structured very differently.
Lifetime mortgages
As the name suggests, a lifetime mortgage has similarities with a traditional mortgage, but there is one subtle but important variation.
Repayment terms
A traditional mortgage would see interest and capital repaid from day one, which differs from a lifetime mortgage. There are no capital repayments along the way, although you can pay interest monthly or let this roll up until the homeowner passes away or moves into full-time care.
On the homeowner’s death, the property will be sold, mortgage capital and any outstanding interest paid off, with the balance returned to the individual or their estate.
Home reversion plans
While ultimately a way of releasing equity from the property, lifetime mortgages and home reversion schemes are very different.
Partial sale of your property
Rather than remortgaging your property, retaining full ownership and taking on extra debt, a home reversion plan would see you selling a share in your property to a third party. Upon the passing of the homeowner or move into full-time care, the property will be sold, and the proceeds will be shared between the owner and the home reversion plan administrator (based on the share of the property they acquired).
One of the main issues with a home reversion plan is that usually, you would only receive between 40% and 80% of the market value of the share you sell. The downside is partly offset by the fact that you can live rent-free until you pass away or go into full-time care.
Looking at the broader picture
As we have touched on above, there are several issues to consider regarding lifetime mortgages and home reversion plans. Age, the value of the property and the amount you’re looking to raise will likely dictate the details of any funding arrangements. Historically, these arrangements were not regulated products, which presented significant risks to those considering one of these arrangements. However, the Financial Conduct Authority (FCA) has recently taken regulatory control, providing a degree of structure and consumer protection.
Summary
While the cost of living crisis has impacted the wider population, many retirees have been hit hard. Amidst an increase in popularity for equity release, it’s essential to do your research, be aware of the pros and cons of the options, and, above all, discuss the details with your financial adviser.
We have experience across the broad financial market, with particular skills in the mortgage sector. If you want to discuss your situation in more detail, please contact us, and we can look at the best options.