Releasing equity for retirement

Homeowners can release some of the value of their property (equity) to top up their retirement savings, through a process known as equity release. Using equity release for retirement income isn't an equal replacement for pension savings, but if you've got a shortfall, then releasing money from your home may help you reach your retirement goals.

What are my equity release options?

When deciding to release equity for your retirement there are two options: either a lifetime mortgage, or a home reversion.

Choosing a lifetime mortgage

Lifetime mortgages are loans you receive - against the value of your house - to create income during retirement. You can release money whilst remaining in your home. Repayment is usually only required if you move into long-term care or pass away.

Similar to a regular mortgage you’ll pay compound interest on your lifetime mortgage. This may eat away into the value of your property if left unpaid. Some lenders may guarantee that your loan will never grow beyond the value of your property.

Choosing a home reversion

Home reversion is the process of selling a portion of your home to provide additional money for retirement. Unlike downsizing - where you sell your home and move away - home reversion offers you the opportunity to stay settled and avoid moving costs.

Home reversion contracts can be tricky. For instance you may not be able to move home, or your home may need to be sold soon after you pass away. It’s important to look into how much flexibility you get for releasing funds from your home.

Am I eligible for equity release?

To be eligible for equity release you’ve got to tick some boxes first:

  • You’ll need to own a property in the UK
  • Your property will need to be worth more than £70,000
  • Your mortgage will need to be mostly - or entirely - paid off

You can apply for a lifetime mortgage from 55 years old, and for a home reversion plan from 65 years old. If you’re applying jointly then both ages will be taken into account.

Some lenders may add extra steps before accepting your application. If you don’t meet all these criteria you may consider releasing funds by downsizing for retirement.

Pros and cons of equity release

Equity release - both home reversions and lifetime mortgages - have many elements to assess. Here’s a summary of some of the pros and cons of equity release:

What are the benefits of equity release?

  • Releasing money from your home back into your pocket
  • Tax-free regular payments - or a lump sum - to support retirement living
  • Value of your property may rise, lowering your loan-to-value ratio
  • You may be able to move if your equity release is transferable

What are the downsides of equity release?

  • Beneficiaries will often receive less of an inheritance
  • Compound interest may grow to a larger amount than your initial loan value
  • Receiving equity release income may reduce your eligibility for benefits
  • You won’t own all of your own home with a home reversion

Equity release is an important choice with many considerations. Even at 55 years old, it’s not too late to start a pension. Saving into a pension for a reliable retirement income - without having to rely on equity release - may give you more money.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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