When you’re retired or approaching retirement, the thought of paying off your mortgage and freeing up some of your monthly budget is a comforting one. Using equity release to do this, you no longer need to worry about making monthly repayments and can use that money instead to make your retirement easier. But is equity release that straightforward and is it the right choice to make?
Why use equity release?
Over the years, the value of your property has increased and you’ve made continuous monthly mortgage repayments. Both of these have increased the amount of equity in your home. Rather than letting it stay tied up in your property, you can release the equity and use it to your advantage.
You can use the cash to go on an expensive holiday, for home improvements, to lend a helping hand to a family member or just to have extra cash available as and when it’s needed. One use, though, is to pay off your existing mortgage. You don’t need to make any monthly repayments and the loan isn’t repaid until your property is sold when you either die or move into long-term care. Interest rates are currently very low so your savings and pension plan may be underperforming. The extra cash you will have instead of repaying a mortgage can be used to enhance your retirement income.
Your equity release options
Equity release is available to homeowners aged over 55 and there are two types to choose from — a lifetime mortgage and a home reversion plan.
A lifetime mortgage
A lifetime mortgage is the most popular choice and the loan is secured against your home. You receive a tax-free lump sum and don’t make any monthly repayments. The loan is repaid with compounded interest when you either move into a permanent care home or die and your property is sold.
As equity release has become so popular, the lifetime mortgage products available have become more flexible. Some of them allow you to pay off some of the interest if you prefer. This means the debt isn’t as much as it would be with compounded interest when your property is eventually sold. You can also choose a lifetime mortgage product that allows you to receive regular small cash sums instead of a single lump sum.
A home reversion plan
With a home reversion plan, you sell part or all of your property to a provider in exchange for a tax-free lump sum and a lifetime lease. Just like a lifetime mortgage, you don’t make any monthly repayments and you continue living in your property until you either move into long-term care or die. At this point, your property is sold and the provider receives its share of the proceeds.
The downside to equity release
Equity release reduces the value of your property and this affects what you pass on to your beneficiaries. You can ring-fence some of the value of your property with a lifetime mortgage, protecting this amount for your beneficiaries. You should also ensure you have a ‘no negative equity guarantee’ so that your estate is not liable for more than the value of your property when it’s sold.
With a home reversion plan, you no longer own all, if any, of your property. As well as that, the amount you receive from the provider will be lower than the current market value. Equity release might also affect your entitlement to means-tested benefits.
Is there an alternative?
Rather than utilising equity release to pay off your mortgage, you may prefer to downsize or switch to a retirement interest-only mortgage. You need to consider the differences between them and decide which one is best suited to your circumstances.
Moving to a smaller property is another way to tap into the equity that has built up in your home. As well as benefitting from the difference in property value, you might also be able to secure a better mortgage deal with lower monthly repayments. A smaller property might also be easier to cope with as you’re getting older.
Just bear in mind the costs involved, such as valuation fees, the solicitor’s costs, arrangement fees and the cost of removals. A big consideration is the emotional tie to your home. You may only be moving from Bexley to Bexleyheath, for example, but you’re moving away from a home you love as well as the neighbours you’ve become friends with.
A retirement interest-only mortgage
Just like a lifetime mortgage, a retirement interest-only mortgage is a loan that’s secured against your home. You only make monthly interest repayments and the capital is repaid when your property is sold, usually when you go into long-term care or die.
If you have a regular, secure income, such as a defined benefit pension, it’s worth considering, especially if you currently have an interest-only mortgage but don’t have a plan in place for repaying the capital when the mortgage term ends.
For this type of mortgage, you only need to prove to the lender that you can afford the monthly interest repayments. However, if you fail to keep up with those repayments, you risk your property being repossessed.
As you are repaying the monthly interest, only the original loan has to be repaid when the property is eventually sold, unlike the loan and compounded interest to be repaid with a lifetime mortgage. This type of mortgage, therefore, gives you more to pass on to your beneficiaries than equity release.
Should you use equity release to pay off your mortgage?
There are numerous factors to take into consideration before deciding on equity release or one of the alternatives. Are you happy to move into a smaller property? Do you have a regular income? Do you receive means-tested benefits? Are you concerned about the amount of inheritance you’d like to leave to your beneficiaries?
Because equity release affects your family members, you really need to sit down with them and discuss the idea with them too. Equity release can also have tax implications so be sure to contact your solicitor for advice on this.
As always, we recommend consulting your financial adviser for professional guidance before you make a decision. He or she will advise you on the best route to take depending on your circumstances and can ensure you have the best plan in place for your needs.