The retirement mortgage trick that lets you take out tens of thousands in cash – but is it worth the risk?

WHETHER you’re struggling with everyday costs or simply want a pot of cash for a specific purpose, there’s a mortgage trick that could help you take out tens of thousands of pounds in cash. You could unlock a chunk of the money tied up in your home for retirement, and on average, homeowners get a £114,000 to spend – but is this money move right for you? You can unlock some of the money tied up in your home to help fund your retirement Credit: Getty – Contributor Equity release can be useful if your home is worth a lot but you don’t have much in savings Credit: Getty Equity release is an option for homeowners aged 55 or over who want to access some of the value tied up in their homes and convert it to cash. You can either get a tax-free lump sum or you can get smaller, regular payments to supplement your income. These payments are also free from income tax – but you must carefully consider if it’s the right move for you. The over-60s hold a total of £3.84trillion in housing equity, which is more than half of the UK’s total housing wealth, according to Savills. But research from Nationwide has found only a third of over-55s want to downsize, with many citing wanting to stay close to family and the costs of moving home. Equity release means you don’t have to sell and move out of your home to access the money. However, you should be aware equity release also comes with some hefty costs. For example, you need to pay upfront fees, such as solicitor costs at around £860, and the interest rate for borrowing is higher than on a standard mortgage. Here’s exactly what you need to consider before making a decision… How does equity release work? Make sure you work out which type of equity release is best for you Credit: fizkes There are two main ways to get equity released from your home: a lifetime mortgage, or a home reversion plan. A lifetime mortgage is designed to last your entire lifetime and gives you the flexibility to decide whether or not to make payments each month. The loan, plus any unpaid interest, needs to be repaid when the last homeowner dies or enters long-term care. You usually need to be at least 55 years old to take out a lifetime mortgage. With a home reversion plan, you would sell part or all of your home while you stay living in it. The reversion company would then get a share of the proceeds when your home is sold, usually after you die or move into permanent care. You need to be at least 60 years old to take out a home reversion plan. An increasing number of Brits are using equity release to help them fund their retirement or pay for care costs. Many retirees are sitting on expensive properties after decades of house price growth, but have only modest pensions and savings. And as life expectancy increases, pensions are now needing to stretch for 20 to 30 years – meaning some retirees are in need of a cash boost. The number of people borrowing through equity release rose by 4% between April and June to 13,489, according to the Equity Release Council. Total lending also increased to £597million, up from £574million. The Pensions Commission says you would need £45,400 a year to enjoy a comfortable lifestyle in retirement today. But the impact of rising inflation means that someone retiring in 2046 would need a whopping £74,393 a year to enjoy the same lifestyle, according to analysis by Unbiased. That’s an extra £28,993 a year that needs to be accounted for. Winston Ruddick, senior consultant at Broadstone, said: “Equity release can have a valuable role to play in retirement planning, particularly for people who have accumulated substantial wealth in their home but have limited pension savings or other sources of regular income.” But with high costs to consider, you’ll need to think extremely carefully before using equity release. When you should consider using equity release Make sure you’re someone who would benefit from using equity release and talk to experts Credit: Alamy Using equity from your home can get you extra cash while letting you continue to benefit from any increase in the value of your property. You can still move to a different property in the future, as long as the equity release provider agrees. You must own property in the UK and it needs to be your main residence. Plus, your home needs to be in reasonable condition and over a certain value – typically around £70,000. You might still qualify for equity release if you have a mortgage, but it will depend on the value of your home and the amount you owe. Samuel Mather-Holgate, managing director at Mather and Murray Financial, says: “Equity release can be a sensible tool for older homeowners who are asset-rich but cash-poor.” He says it’s particularly useful if you need the cash to fund essential living costs, clear expensive debt, adapt a home or support a more comfortable retirement without needing to move. Many retirees also use equity release to help their children with a deposit to get onto the property ladder. Mr Mather-Holgate says: “For some retirees, their home is their biggest unused financial asset, but unlocking it should sit alongside pensions, savings, tax planning and benefit entitlement, with proper regulated advice and family conversations where appropriate.” Experts say it should be more of a last resort when it comes to your retirement planning. Ideally, you should focus on using your pension, investments, savings and benefits before turning to equity release. What are the risks of using equity release? The money you could get from equity release can be life-changing – if it’s right for you Before using equity release, you should speak to a financial adviser about your options. You’ll usually need to pay for financial advice, but you can get free support from MoneyHelper if you’re over 50, or from charities like StepChange and Age UK. David Stirling, independent financial adviser at Mint Wealth, says: “Equity release can be life-changing or quietly catastrophic, depending almost entirely on whether anyone explained the small print. “The decision is largely irreversible, the products are complex, and the sales process is not always as independent as it presents itself.” The biggest risk is that the interest can compound over the years and wipe out your family’s inheritance when you die or move into long-term care. That’s because the equity release lender must be paid back in full when your house is sold, so this will come out of the sale proceeds before the rest of the money can be passed on to your family. Equity release interest rates are currently between 6.5% to 8% on average. That’s compared with the average five-year fixed mortgage rate, which is currently 5.65%. For example, if you borrow £50,000 while making no monthly repayments this can more than triple in around 16 to 19 years before the property is sold. Plus, as the amount you owe increases this will eat into the equity you have in your home. Sarah Coles, head of personal finance at AJ Bell, says: “In some cases, people may want to downsize later in retirement, and equity release has swallowed so much of the value of their home that they don’t have enough left to buy a smaller, cheaper property.” To avoid this, you could choose a plan with downsizing protection, which means you can pay off your loan early without an early repayment charge if you move to a new, smaller home. Normally, paying off an equity release plan early triggers a heavy penalty, which can be up to 25% of the total loan amount. You could also opt for a drawdown facility, which means you only borrow what you need in smaller amounts over time. Or you could make voluntary monthly payments to chip away at the interest and stop your debt from growing. Equity release will also reduce the amount that will go to the people named as beneficiaries in your will. And if you live in the property with any dependents, it can get complicated. To stay living in the property with you, your dependents may need to sign a waiver confirming they don’t have the right to keep living in your home if you die or move into care. This can also affect friends or family members moving into the property after you’ve taken out equity release. Broadstone’s Mr Ruddick says: “Before proceeding, people should consider what the money is needed for, whether a lump sum or smaller withdrawals would be more appropriate, and how long they expect to remain in the property. “Alternatives such as downsizing, accessing unclaimed state benefits, using other savings or adjusting pension withdrawals should also be explored.” How else can you fund your retirement? YOU can still free up some of your cash in retirement without taking out equity release. Retirement interest-only mortgage David Hollingworth, associate director and L&C Mortgages, says you could consider a retirement interest-only mortgage. With one of these, you pay the interest off every month but not the actual loan amount – so you’d pay less monthly than on a standard mortgage. You’d therefore have more free cash day-to-day. Like with a lifetime mortgage, the loan is usually paid off when you sell the house, die or move into long-term care. However you can get a much lower interest rate and pay as you go, preventing you from building up massive interest charges. You would also leave a much larger portion of your property value to your family when you pass away. Mr Hollingworth says: “Being interest only reduces the monthly payment, but there is still a monthly payment so you would need an affordability assessment.” Downsizing If you’re willing to move home, you could buy a smaller or cheaper property instead. This can give you a cash lump sum, and also potentially bring down your utility bills. Remember to factor in the costs of moving and selling your home. The HomeOwners’ Alliance estimates the average cost of moving is £13,018, based on buying and selling an averagely priced house worth £292,000. Pensions and savings Before you take on any new debt, you should try accessing your cash savings. For example, you might have money sitting in a Cash ISA, easy access savings account or in the stock market. You could also consider drawing down your pension if you’ve hit 55. You’re allowed to take out 25% of the value of your pension tax-free, up to £268,275. Another option is to buy a pension annuity, which converts your pension savings into a guaranteed regular income – usually for the rest of your life.