When thinking about retirement, a great many things come to mind. Some of us may be pre-occupied with which far-flung destinations we’d like to visit first, while others might be set on picking up a long-desired hobby.
However, the financial side of the retirement equation is a part that cannot be ignored – particularly in an economic environment where retirement planning has been made harder than ever. For those struggling to square the books, there are several ways to bolster retirement finances, with one having become particularly popular: equity release. What exactly is it, though, and could it work for you?
What is Equity Release?
For the uninitiated, equity release describes a family of financial products and schemes that enable people to ‘release’ part of the value of their homes as a long-term loan. For the vast majority of people in the UK, the most valuable asset they own is the home in which they live; using an equity release product enables them to access some of that value, where it would otherwise remain wrapped up in the property itself until its sale.
Different forms of scheme enable different ways of receiving the money, and of repaying it. Some pay a pre-agreed sum as an annuity, while others pay a single lump sum up front. Some lenders enable you to pay just the interest on the money given until the end of the agreed term; all tend to recoup the full value of the equity release on the eventual sale of your home, when you pass on or are otherwise entered into later-life care.
The Benefits and Risks
Equity release schemes are a highly useful way to make a relatively large sum of money available in short order, which can in turn make certain necessary expenditures much easier to swallow. Whether you have some emergency repairs to cover, or some necessary accessibility upgrades to order for your home, equity release can make what would otherwise be a crippling out-of-pocket cost bearable. When it comes to taking the money as an annuity, equity release can be useful for covering core costs – leaving the rest of your retirement finances as fun money.
However, these benefits do not exist in a vacuum. Equity release, being a financial product, brings with it its own share of risks. For one, it is a loan with an interest rate, which ultimately means more money will be returned than was initially given. This may not be an issue for smaller families or retirees with no next-of-kin, but can become an issue for them if they fail to keep on top of interest repayments for the duration of the term. For this reason, a careful budget should be drawn up to prevent the overstretching of finances.
Before You Proceed
Before you sign up for an equity release product like a lifetime mortgage, there are first some essential things you need to know. For one, you will not be able to utilise an equity release scheme unless you are over 55. Also, if it is possible to free up a large enough some by downsizing your home, you might do this first; proceeds from downsizing would be completely yours to use, without so much as a monthly interest fee to consider.
