Can you unlock the equity in your home?
More than £800 billion worth of property is owned by the over-65s, according to the Key Retirement Solutions Pensioner Property Index. Given that government figures show the average gross income for pensioner households is just £477 a week, tapping into the value of your home could be a way of boosting your standard of living in retirement.
Using your bricks and mortar to help fund your retirement is likely to become more popular, too, as Nigel Waterson, chairman of the Equity Release Council, explains: "Attitudes are changing as we move from the ration book generation to the baby boomers. Not only are they less wedded to the need to leave an inheritance, a lot of people coming up to retirement have less pension provision, having been caught between generous final salary schemes and automatic enrolment."
The proposed changes to how we take our pensions are also likely to make more people consider their home as a means to generate cash. For instance, while Craig Colton, chief executive of Aviva's equity release company, isn't expecting an increase initially as people will be able to take more from their pensions, the flexibility will make a difference in the long term.
"Some people will run their pensions down and have to turn to their property to generate an income but I think the flexibility will also make people feel more comfortable about using all the assets available to them to fund their retirement," he says.
In addition, the Equity Release Council is lobbying to have equity release included in the guaranteed guidance on pension choices that will be provided at retirement.
But while more of us are likely to turn to our homes to supplement our retirement income, there are a number of ways to achieve this. As each has its financial planning implications, it's essential to understand the pros and cons before deciding what's best for you.
Downsizing is probably the simplest and most effective way to release cash from your home. By moving into a cheaper property, the difference between the two prices, minus any charges, becomes available.
Moving house at this stage in life is popular, with many retirees considering it as a way to improve their lifestyle, whether this means being nearer the sea, countryside or grandchildren. It can also be cheaper to run a smaller property. The cost of everything
from the utilities through to the maintenance will generally shrink as your home does.
But downsizing is not without its catches. It's not always easy to find a suitable property that will allow you to release the money you want. Andrea Rozario, chair of independent adviser Bower Retirement Services, explains: "Depending on the location, it may only be possible to release enough equity by moving a considerable distance to take advantage of house price variables. This could mean leaving friends, family and neighbours, and a smaller home could also make it difficult to put up visitors."
Moving house is expensive too, with stamp duty and fees from estate agents, solicitors and removals firms taking a large chunk out of the equity you release. Figures from rightmove.co.uk show that moving in Kent from a £400,000 property to one worth £250,000 would cost
around £12,200 in stamp duty and fees.
In addition, you also need to weigh up property price inflation. If prices increase, a smaller property is unlikely to make as much as a larger one.
But while it's relatively straightforward to work out the economics, Keith Haggart, director of retirement needs at Just Retirement, says the costs don't always feature when considering a move. "It's often more of an emotional decision than a financial one," he says. "A lot of people are reluctant to leave the home where they've lived for the past 40 years and brought up the children. It's very rarely about comparing the costs."
Take in a lodger
For some people, the solution to staying in the family home is to fill it again by renting out a room. The number of people aged 65-plus taking in lodgers increased by 46% between 2011 and 2013, according to research by rental website spareroom.co.uk.
It can be an effective way to top up an income. Although rents vary around the country, SpareRoom estimates that over the course of their retirement people aged over 65 could earn £128,639 by renting out a spare bedroom, with this figure increasing to £176,341 in London.
Live-in landlords can also take advantage of the government's Rent a Room scheme. This allows you to earn up to £4,250 a year tax-free if you rent out furnished accommodation in your home.
But while it's a tax-efficient way to boost your income, it's not without its pitfalls. Sharing your home with a lodger can be strange and possibly unsettling, especially if you've lived there with your family for many years.
Rather than take in a lodger, another option for retirees wedded to staying in their home is equity release. This is an arrangement with an insurance company that allows you to take some of the value of your property as cash.
It is growing in popularity. The latest statistics from the Equity Release Council show that £641.2 million was released to more than 10,000 new customers in the first half of this year. And it can realise a significant lump sum. For example, in 2013 the average loan was £56,917 and although it's available from age 55, more than 50% of customers are aged between 65 and 74.
You're also free to use the money released however you like. Research by Just Retirement found the top reason was to clear the mortgage (29%), followed by home improvements (17%), clearing debt (14%) and a gift for the family (12%).
There are two main products – lifetime mortgages and reversion schemes. Of these, lifetime mortgages are the more popular. Vanessa Owen, head of annuities and equity release at LV=, explains: "You borrow a lump sum, which will depend on your age and the value of your property, and then interest is compounded on the loan. This only becomes payable on death or when you move into a care home."
Cost of equity release
While equity release might sound like a great way to access the equity that has built up in your home, it can come at quite a high price.
For starters, the interest rate that you pay will be higher than on a standard mortgage, given the long-term nature of the product and security of tenure. At least they are fixed, making it easier to understand potential costs. LV=, for example, charges 6.19% on its lifetime mortgage.
You also need to bear in mind that as interest rolls up each month, it compounds so that each year you'll be racking up interest on a bigger debt. As a result, the longer the loan lasts the more costly it becomes. Take a £50,000 loan with a rate of 6.19% – according to LV=, after one year that debt plus interest would be £53,095, over 10 years it would become £91,160 and after 20 years that £50,000 loan will have more than tripled in size to become a debt of £166,204.
There are also charges to take into account. These are very similar to those you'd encounter on a standard mortgage, including a valuation fee, application fee and solicitor's fee. In addition, as many providers insist on independent financial advice, you'll need to factor this in, too. As a rough guide, Owen says you could expect to pay around £2,500 to arrange equity release, including a valuation fee of £222, an application fee of £595, a solicitor's fee of £500 and an adviser fee of £1,000.
Flexible lifetime mortgages are also available, which allow you to earmark some equity in your property that you can release when required. Interest rates tend to be slightly higher – for example, LV= charges 6.29% - but as you're only charged interest on the money you've taken, it can work out more cost-effective. Owen adds: "If you don't need the money immediately, you'll only earn about 1% interest on it in a savings account but you'll be paying 6.19% to borrow it."
Some schemes let you pay back some interest, either on a monthly or ad hoc basis. This helps to slow the growth of the debt, as the longer it rolls up the bigger it can become.
No negative equity guarantees ensure you'll never owe more than the value of your home but if you're keen to leave something behind you could take out an inheritance guarantee. Colton explains: "Some schemes allow you to set aside a proportion of the house as an inheritance, say 50%, and the provider will only lend on the remainder. The inheritance part is ringfenced and will benefit from any property price inflation."
Whichever product you choose, there's nothing to stop you going back for a second or third bite. The older you are, the greater the percentage of equity you'll be able to release and you may also be able to tap into any growth in property prices. However, taking out a second release will mean more charges so it's perhaps unsurprising that twice as many people go for the flexibility of a drawdown lifetime mortgage rather than the lump sum option.
Equity release costs
The effect of interest on a £50,000 loan on a lifetime mortgage with an interest rate of 6.19%
Annual interest: £3,095
Total debt: £53,095
Annual interest: £3,935
Total debt: £67,513
Annual interest: £5,314
Total debt: £91,160
Annual interest: £7,175
Total debt: £123,090
Annual interest: £9,688
Total debt: £166,204
Reversion schemes are the other option, although these only account for less than 1% of the equity release market. These are offered by a handful of companies including Bridgewater, Hodge Lifetime and Newlife, and work in a different way to lifetime mortgages. Rather than borrow money against your home, you sell some or all of it to the reversion company in exchange for a lump sum.
The amount you'll receive will depend on your age, with this increasing as you get older. But, as you are given the right to remain in the property until you die or move into care, the amount you receive could be significantly less than the property's value.
You'll need to pay fees on a reversion scheme. These include a valuation, legal work and financial advice, which can add up to a couple of thousand pounds. Reversion companies will also want to inspect the property on a regular basis to make sure it is properly maintained and, even if they own it outright, you'll be required to pay for any work.
When comparing reversion schemes to lifetime mortgages, Rozario says there are pros and cons. "You may be able to receive a larger amount of equity with a reversion scheme but you will lose out on any house price inflation on the part of your property you sell."
Seek financial advice
But whether you move house or take out an equity release scheme, as you're making decisions with what is generally your largest asset, it's sensible to seek advice. The route you take to release equity could also affect your entitlement to benefits and the inheritance you leave.
"Get good advice and don't rush into any decisions," says Lucy Malenczuk, senior policy manager at Age UK. "It might be worth checking your benefit entitlement or, if you're up for it, going back to work. Speak to your family if you can as they might come up with other options, too."
Downsizing and equity release – the pros and cons
|PROS||A smaller house should be cheaper to run||You can stay in your home for life or until you move into care|
|You own the property outright, so it can be left as an inheritance or used for equity release||Portable, allowing you to take the loan with you to another home if you decide to move|
|No negative equity guarantee means you'll never owe more than the value of your home|
|CONS||Significant upfront costs including estate agent, removals and stamp duty||Interest rolls up on the original loan, which can transform it into a significant debt|
|House price inflation will generate a lower return on a smaller property||Expensive to set up|
|May have to leave social network to release enough capital||Interest rates are higher than on a standard mortgage due to security of tenure|
|Potential emotional upheaval||It may wipe out any inheritance you had hoped to leave|
This article is taken from How to Retire in Style, a standalone retirement magazine from Moneywise. Available in newsagents or at moneywise.co.uk/retire
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.