Thanks to improved health consciousness and the development of modern medicine, most senior citizens will live well beyond their retirement. Unfortunately, unless they have a good pension plan or have saved for their retirement years, this could leave them short of money the older they get. For some seniors still living in their own homes, they may choose to get a loan on the equity from their property to ensure they have enough money to live on.
What is Equity Release?
An equity release is a type of loan allowing you to retain the use of your home, with the money you receive being released as a lump sum payment or to create an income stream. Before considering this type of loan to help finance your retirement as you get older, you should be aware this scheme is only a loan that will need to be paid back at some point, with most companies receiving payment after the homeowners have died.
Types of Equity Release Schemes
There are two types of equity release schemes: home reversion loans and lifetime mortgages.
Home Reversion Loans
With a home reversion loan, the property owner commits to giving a share of their property to the loan provider in exchange for cash. Once the owner passes away or moves into a retirement home, the property is sold and the part of the proceeds promised to the loan provider is given to them as repayment for the loan. For instance, if the owner sold 25% of the property to the loan provider, once the property is sold, the provider would get 25% of the money from the sell.
A lifetime mortgage allows a homeowner to borrow a portion of their property’s value, with the loan accruing interest over time. The money isn’t repaid until the owner dies or has to sell their house. With this type of equity release scheme, loan providers allow homeowners 55 and over to convert the equity they have in their properties into a loan. However, property owners must be at least 65 to take advantage of home reversion loans.
Cost of Equity Release Schemes
Although the money you borrow is tax-free, the loans are charged interest, so it may cost much more to repay after a few years than the amount you borrowed. Along with the interest, you also need to consider that an equity release scheme can reduce the value of your estate, and it can affect the amount of your benefits or tax position. However, an experienced financial planner can help you compare the Responsible Equity Release cost with other provider’s equity release schemes.
If you’re considering an equity release scheme to help bolster your retirement, talk it over with an accountant or a financial planner to see if the benefits outweigh the drawbacks of this type of loan. With careful planning, it could work to your benefit and still allow you to leave a portion of the estate to your heirs.