Due to a shortfall in pensions saving and the rapid rise in house prices, an increasing number of people in the UK are withdrawing equity from their homes as a means of funding their retirement. But how much can you borrow and what are the implications?
The amount you can borrow is determined by your age, the value and type of property you own and in some instances your own lifestyle and health. If you decide to take out a joint plan, it will be based on the age of the younger person. There are many free online equity release calculators available and it is worth using these to get a rough estimate before contacting a provider.
The majority of the big providers will limit the amount you can borrow to ensure that your debt will never be greater than the total value of your home. This means that the average borrower, in their late sixties, will generally be allowed to release no more than 35% of their property’s total value. Data collected by Key Retirement Solutions has shown that between 2007 and 2013, borrowers were inclined to only take roughly three quarters of their maximum allowance. This seems to be a wise move on their behalf as it is advisable to only borrow as much as you think you will need. Equity release rates can appear as though they are not much higher than mortgage rates however, they can often cost much more in the long term as no repayments are made until you die and the interest can accumulate rapidly. For example, a person in their mid sixties borrowing £20,000 at 6.5% on a house worth £120,000, who then went on to live a further 25 years would require a repayment of £100,000 upon their death.
There are two types of similar equity release products- a lifetime mortgage or home reversion plan. Both products entitle you to stay in your home until you die and then the property is usually sold to pay off any debt. Most lifetime mortgages and home reversion plans are regulated by the Financial Services Authority and it is also advisable to choose a plan from a provider that is a member of the Equity Release Council.
There are important points to consider when thinking about equity release and ultimately you must consider what your end goal is. If you don’t have dependents and therefore have no one to leave your property too after you die, then you equally have no debt to pass on and it will be written off. Is it an option to downsize? By moving to a smaller, cheaper house it will not only be more manageable to run as you get older, but will have less debt attached to it. Also think about alternative ways to raise funds, for example, have you claimed all of the state benefits you are entitled to, do you have other savings or assets or you could even consider renting out a spare room in your house?
If you are still unsure and would like the unbiased opinion of someone experienced in their field, then it is highly recommended that you use an independent financial advisor.