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Retirement Equity Release – What to do, Tips & More

Retirement Equity Release

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What is retirement equity release and how does it work? We provide a crash course on equity release options for retirees in the UK and provide some top tips along the way. If you’re seeking an equity release scheme to help fund your retirement, this guide is the perfect place to start your research. Don’t forget to also look for independent equity release advice for personalised and professional recommendations. 

What is retirement equity release?

Retirement equity release refers to different products used by seniors to access some of their home equity as a lump sum or drawdown and have to make no monthly repayments. It can only be done on their main residence.

Either using a lifetime mortgage or home reversion plan – which are explained below – they can access tax-free home equity to help fund retirement but only repay the debt from the sale of their home after death or if they move into long-term care. 

If you do consider using a lifetime mortgage or any other equity release product, you will need to engage a financial adviser first. You should only use a lender that is a member of the Equity Release Council to receive additional assurances like the negative equity guarantee, which will be explained later. 

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Do you have to be retired to get equity release?

Although it is frequently referred to as retirement equity release, usually because the money helps fund retirement, you do not necessarily have to be retired to use an equity release plan. 

Most plans are available to people that meet a minimum age requirement of 55 years old. Some plans may require you to be older to apply. If there are joint homeowners, the youngest homeowner must meet the age requirement. 

What is the catch with retirement equity release?

As long as you do your research and use an independent equity release advice service, there should be no unexpected surprises or catches with your plan. However, some consider the ‘catch’ of equity release as how expensive it can become over time. The amount you need to pay back from the value of your home when it is sold can easily be more than double the lump sum you received. 

The reason why will become evident when you learn how lifetime mortgages and home reversion plans work – see below. 

How does retirement equity release work?

UK seniors have two options to release equity, either using the more-common lifetime mortgage or a home reversion scheme. 

  1. Lifetime mortgage

Lifetime mortgages allow the homeowner to access a tax-free lump sum or drawdown up to 60% of the value of their home, depending on their age and details about the property. As soon as they receive the money, it is charged at a fixed interest rate. 

Just like the loan amount, the interest does not need to be repaid each month but you can often volunteer to pay it. If you don’t volunteer repayments, the interest rolls up and gets added to the total debt to be repaid from the eventual sale proceeds. 

For example, you might take out 33.33% equity from a £195,000 home (£65,000). If you have your lifetime mortgage with a 6.4% interest rate, you would owe close to £137,000 after 12 years. 

  1. Home reversion plan

Home reversion plans allow the homeowner to also access a lump sum or drawdown. But unlike lifetime mortgages, they do not charge any interest on the amount borrowed. Instead, at the start of the plan, the homeowner must agree to give the lender a percentage of the home’s future sale value, which will be greater than the amount of equity taken out.

For example, you may take out £20,000 (20%) equity from a £100,000 home but be asked to give up 60% of its future sale value. If the property increases in price, this will be a repayment of more than £60,000 for the initial £20,000 loan.

What are the pitfalls of equity release?

There are many potential pitfalls when taking out a lifetime mortgage or any other equity release plan, which is why it is essential to seek financial advice beforehand. Another pitfall could be to choose a lender that is not a member of the Equity Release Council.

And here’s why… 

What is the Equity Release Council?

The Equity Release Council is a group that invites any company working in the equity release sector to become members and follow rules and guidelines set down by the council. These rules are in place to provide homeowners with greater protection and assurances. Many people only consider members because they know they are covered in specific situations, which also motivates lenders to join and abide by those rules. 

Some of the benefits include:

  1. You can never be evicted – you will not be evicted unless you have lied on your application or are secretly not living in the property anymore. 
  2. You can move – you have the right to move and take your mortgage with you when suitable.
  3. The negative equity guarantee – this guarantees you will never have to pay any shortfall between the debt owed and the sale proceeds. So if the debt exceeds the property value, the remaining debt does not need to be repaid. 

Can you lose your state pension after releasing equity?

Nobody in the UK can lose the right to receive their state pension by using an equity release scheme or lifetime mortgage. The reason for this is that the basic state pension is not means-tested and how much you have saved does not affect what you receive.

However, some people in the UK receive pension credits, which are top-up payments to their state pension which are based on how much you have saved. You may lose access to pensions credits by receiving equity release money and keeping it in the bank rather than spending it. You may be able to mitigate the effects by using a drawdown facility instead of receiving a lump sum amount. 

Do you want to release equity in retirement?

If you want to know more about retirement equity release in the UK, you can find out lots more by staying tuned to MoneyNerd. In fact, we just released over 100 new articles all about equity release. You can read them for free right now on our website.