Are Equity Release Schemes Helpful for Pensioners?
Equity release is certainly available to pensioners to add to their income or access a larger value than they would be able to access through their pension scheme.
It may be helpful if you:
- Need to borrow capital, but want something more affordable than a personal loan or a credit card.
- Are ineligible for other forms of borrowing.
- Want to invest in home improvements, buy a new car, or other larger outlays.
- Don't have a sufficient pension income to live on.
Of course, the downside is that you won't be able to leave your home to an heir in your will, and only a proportion of the value will likely remain after the sale.
If you live for a long time, the interest charges may accumulate to more than you originally borrowed. When the lender sells the property, there may be nothing left for your beneficiaries.
What Are Equity Release Schemes Used for?
There aren't really any limits on what you can do with the cash you access through a retirement equity release scheme, and you might plan to:
- Avoid downsizing and live in your home for life.
- Improve your living quality by having a higher expendable income.
- Consolidate or repay other debts, including a mortgage.
- Support family members by repaying debts or gifting cash.
- Pay for home improvements.
- Finance a holiday or another leisure activity.
- Set money aside to pay for a care home.
These are just some examples, and you can apply for equity release even if you don't have a specific plan about how you'll spend the capital.
What Are the Benefits of an Equity Release UK Product?
The key benefit of equity release is that it's pretty easy to apply. Unlike other mortgages and loans, the lender won't be worried too much about your other income or affordability since you won't typically make any repayments.
Retirees with a bad credit score are more likely to qualify for equity release than other loan types.
You also have lots of choices about how you receive the capital. You might want one big payment or to take smaller amounts when you need them, reducing the total interest payable.
Other advantages of equity release as a retirement strategy include:
- Tax-free payment - you incur interest on the loan but don't pay any tax.
- No repayments - unless you go for an interest-only equity release product, you don't make any repayments.
- No relocation - equity release gives you the right to live in your home for life or until you move into long term care.
- Inheritance management - you can cap the amount of equity to borrow against to, say, 50%. That assures you that 50% of your property value will go to your beneficiaries.
The other factor to consider is that equity release mortgages are regulated and must have a guarantee against negative equity.
Even if you live considerably longer than expected, the lender can never recoup more than the sale value when they sell the property.
The Disadvantages of Equity Release Explained
It's vital to grasp the pitfalls and the advantages, and if we discuss equity release, we'll ensure you understand the disadvantages.
- Loan interest - if you’re not making any payments, the interest can roll up to more than the original loan value - although it's capped to avoid a negative equity situation.
- Benefits - retirees receiving means-tested benefits might find that a lump sum payment takes them over an income threshold, and they are no longer eligible. Note that this doesn't impact access to the State Pension.
Moving Home and Equity Release Explained
A common misconception is that if you take out an equity release loan, you have to move or won't be allowed to move in the future - neither is true.
Firstly, you have the right to live in your house for as long as you need it, whether that's five years or 50.
Secondly, you can move if you wish. Some people decide to downsize, sell their current property, buy somewhere smaller and use the rest of the proceeds to pay back the debt.
Alternatively, you could keep an equity release product but transfer it to a new home, although the lender would require a valuation to check how much the new property was worth.
What is the Cost of Equity Release if I Am Already Drawing a Pension?
Normally, the cost is nothing to you, but that doesn't mean an equity release product is free (far from it!).
You don't have to make interest payments if you don't want to, but the interest charge is still being added to the original loan.
When you die or go into care, the lender will sell the property and recoup their funds, including the capital plus interest.
