Retirement represents more than the winter of your life. Retirement is an opportunity.
It’s a period where people indulge in all the hobbies, holidays, and activities time never allowed for in their youth.
It’s a chance to fulfil your dreams at an easy and leisurely pace. Retirement is about having more time, whether it’s time to relax or time to play.
This is true now more than ever, as medical advances have led to people living longer and healthier lives.
Yet as a consequence, these days there is growing concern over whether people’s pension and retirement savings are enough to maintain their standard of living and spend their time as they please.
This change in demographics is complicated by the fact that for many retirees, the largest asset they hold is their home. Despite the fact that property values have increased over the past decade, until a home is sold that equity is in a sense theoretical, locked in coffers made of brick and mortar. This can be a painful reality for many retirees looking to apply this net worth toward their lavish retirement plans.
An ER scheme can alleviate these concerns by providing income or a lump sum cash payment in exchange for a loan or partial sale of your home. Many residents in the UK are considering taking advantage of this investment vehicle to ensure a more comfortable retirement.
Home Equity Explained
The equity of your home is the current value on the open market minus the debts held against it. Releasing equity allows you to obtain cash for this value without having to move out of your home. Although there are a number of options as to the amount, delivery, and cost of this release, it is essential to remember that an ER scheme represents a lifetime commitment.
Short term financial difficulties are generally better served with more suitable solutions, such as government assistance or debt management support. As a result, ER schemes are obtained by retirees for less essential expenditures.
Some of the common uses for ER are:
Luxury Items – Regardless of whether it’s a lavish holiday or a fancy new car, often times the only way to afford a luxury item while maintaining their standard of living is to tap into the equity of their home.
Healthcare Costs – Unexpected maladies are common among the elderly, and coverage is typically expensive as a result. Whether it’s for a long term illness or recurring bill payments, homeowners may decide an increase in income may be necessary for the duration of their retirement.
Gifts to children or Grandchildren – Whether it’s college education or a piece of property, an ER can provide assistance for family members with less financial wherewithal
Additional Income in Retirement – For those with diminished savings and pension, topping off their income provides more flexibility
Home Improvement – As most of retirement is spent lounging in the home, many individuals choose to transform their humble abode into a decorative palace. Kitchen upgrades, garden landscaping, or a new conservatory or just some of the additions homeowners commonly build.
In order to be eligible for an ER scheme, you must qualify under the following conditions:
- 55 years of age – Some schemes require a minimum age of 60
- Full ownership of property valued at over £70,000
- Property in reasonable condition suitable for loan purposes (may require home valuation and surveyor’s report)
- Little to no remaining mortgage
- Uphold responsibility for maintaining your home
In addition, most companies will institute a minimum and maximum amount that a homeowner can receive for their ER scheme. Other conditions may include exclusion of people living in leasehold flats or homes that have been built with wood or prefabricated materials.
Most ER schemes are prohibited from being offered to the following property types:
For lifetime mortgages – maisonettes, freehold flats, mobile homes, houseboats, flats located in a local authority or housing block greater than 4 storeys, bed and breakfast properties, hotels, and guest houses
For home reversion schemes – maisonettes, flats, retirement homes, mobile homes, commercial property, sheltered accommodation, newly built properties, houseboats, former local authority housing.
Things to Note When Considering Releasing Equity in your Home
All ER products require borrowing against or selling a portion of your home, and you should take careful consideration before entering into a scheme. Not only are the long term costs substantial, they may affect your ability to collect entitlements such as grants or state benefits. Some of the risks you will endure with an ER scheme include:
Risk of Losing Your Home
Lifetime mortgages – Failure to make payments on interest-only loan.
Home reversions – Failure to pay rent or violation of lease terms.
Lifetime mortgages – Early repayment charges are applied to terminations and switches.
Home reversions – Cannot be cancelled or revised.
Risk of Early Death
Lifetime mortgages – On fixed repayment plans, an early death can result in a heavy cost to the borrower as opposed to interest-based lifetime mortgages. Schemes that distribute income through an annuity may cease to make payments upon death, providing little value.
Home reversions – The reversion company would receive market value for a percentage they paid considerably less for only a few years prior.
Family and Inheritance
Another risk associated with ER schemes is the potential degradation of your inheritance. Before you decide on a lifetime mortgage or home reversion, be sure to involve your family in the decision process. Liquidating the assets from your home reduces the value of your estate and the total inheritance you will leave to your descendants.
Having them be a part of the conversation now works as a pre-emptive measure to avoid hurt and resentment after your death.
Naturally, you may be concerned that your family will disapprove of any decision that may affect their inheritance. However, most retirees discover that family members are generally supportive of how they choose to spend their equity. Children are usually more concerned with your health and well-being than their inheritance, many of whom have established financial security through their own means.
Nevertheless, it is still important to involve family members in the process, as your decisions will affect them at some point in the future. For those with financial difficulties, discussing the dilemma with relatives may lead to alternative means of support.
Finally, although your family may be amenable to a reduction in inheritance, it’s important that you ensure that your loan does not burden your children. Obtaining a ‘No Negative Equity’ guarantee ensures that regardless of how long your loan accumulates interest, it will never be more than the value of your home.
This guarantee holds true even in cases where home prices drop precipitously. Other companies may offer ‘Inheritance Guarantees’ as well which promise a portion of the property sale will pass on to your beneficiaries.