Equity Release

Asset Rich and Cash Poor? Equity Release could be an option – Here’s what you need to know.

The economic outlook for many people is rather daunting. We can now expect to live longer and as such will need to contribute a lot more towards our retirement. Many people in retirement find themselves in the “asset rich and cash poor” situation as they reach mid retirement.

Many people value the property they live in, not only as an asset for the purposes of leaving a legacy but principally as home. Unfortunately, many people are having to resort to downsizing in order to cut the ongoing costs of running their homes, as well as releasing capital to maintain their living standards. However, the disadvantage of this exercise is 2-fold; firstly the availability of a suitable property in the correct location and secondly the underlying costs of moving, and the time frames involved.

Property as an investment is very illiquid, therefore it can be difficult to use the value of your home to boost your finances. Many clients would like to have their cake and eat it and we have seen a considerable rise in the use of Equity Release products which allows people not only to stay in their own home but also release capital to enhance their cash/ income position. Equity Release is a way of releasing cash out of your property by effectively taking out a loan secured on your home without necessarily having to repay the loan.

Equity Release is a very suitable solution for a lot of people and there are numerous situations that Equity Release can help with. Like all things though, with Equity Release, there are positives and negatives so advice needs to be sort in relation to this area of your financial planning:-

Positives
• A tax-free lump sum – which can be used for any purpose
• With planning, you can withdraw money as and when you want it. (Drawdown)
• You can live in your home for as long as you want.
• No regular repayments – the loan is repaid when the property is sold.
• Depending on the plan you take out, you may have options to still leave some inheritance for your dependents.
• Reduces the value of your Estate.
• Allows you to gift your children/grandchildren now which allows you to see them enjoy their inheritance.

Negatives
• The value of the estate you leave behind will be reduced.
• Equity release can affect your entitlements to state benefits.
• Charges may apply if you choose to repay the loan early.
• The debt will grow over time, and interest adds up, although this can be limited by releasing money only as you need it.
• Due to the nature of the compounding interest and the unknown duration of the loan, it is not possible to calculate the final debt amount.

Equity Release is only available for people 55 and over, and paid back when your property is sold. The amount that can be released will be based on your property value, your age and your health status.

There are two types of equity release, a home reversion scheme or a lifetime mortgage.

A Home Reversion Scheme allows you to sell a proportion of your home to an Equity Release company. For example, you can sell 50% and retain 50% of the value of your property for inheritance purposes.

Lifetime Mortgages are a fixed interest rate loan. Unlike conventional repayment mortgages, you don’t pay it off in regular instalments. Instead, your debt is rolled up, which means the interest is calculated on an ever increasing total, and only repay it when the property is sold.

Both of the above options need to be discussed with a qualified Financial Adviser as well as discounting other alternatives.

Equity release schemes are designed to be a lifelong commitment, so, if you change your mind, need to move to a new house or want your equity for something else later, you could find yourself seriously restricted.

If you are asset rich and cash poor and would like a no-obligation chat on what solutions are available to you please contact Katie Lawley at The Law Practice.

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