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Equity Release in Retirement
25 June, 2024 4 minutes reading time
Equity release continues to gain popularity among older UK homeowners, often due to rising property values and the need for additional income in retirement. It allows them to tap into the value (equity) they’ve built up in their homes without selling. But it’s a significant financial decision with legal and financial implications. For instance, it could affect your eligibility for means-tested benefits and the inheritance you pass on to your loved ones. Here are a few pointers to explain what equity release means contractually and how it works in practice.
Beyond the Basics
Equity release secures a loan against your home, providing you access to cash without selling the property. There are two primary options:
1. Lifetime Mortgage
This involves borrowing against the value of your home, with interest accruing over time. You typically repay the loan upon death or when you enter long-term care.
2. Home Reversion Plan
This option involves selling a share of your home in return for a lump sum or regular payments. You retain the right to live there rent-free.
Key Considerations
1. Scrutinise the Contract
Equity release contracts are detailed and can be confusing. It’s essential to read them carefully and understand your agreement. Understanding the contract is vital to making a good decision about equity release. Here are some key things to look out for:
- Find out what the interest rate is and if it could change. A higher interest rate means you’ll owe more money over time.
- Ask about any fees you’ll have to pay, like the cost of setting up the loan or getting your home valued.
- If you want to repay the loan early, find out if there are extra charges. These can be pretty high.
- Check to see if the contract includes a no-negative equity guarantee. This means that even if the value of your home decreases, you won’t owe more than what your house is worth. It’s a safety net that ensures you won’t end up in debt because of your equity release.
- Equity release can affect how much you leave behind for your loved ones. Find out how much of your home’s value they’ll inherit after the loan is paid off.
2. Seek Independent Legal Advice
Equity release can be a valuable tool to enhance financial security in retirement, but it requires a comprehensive understanding of the legal framework. Seeking independent legal advice, a legal requirement before signing any equity release agreement is not only advisable but empowers you to take control of your financial decisions. A solicitor will pay close attention to clauses regarding fees, interest rates, potential early repayment charges, and any restrictions on using funds, ensuring you fully understand the terms of the contract.
3. Look at the Long-Term Implications
As we’ve already mentioned, equity release can affect your eligibility for means-tested benefits and the inheritance you pass on to your loved ones. It’s crucial to engage in open and honest discussions with your family, understanding their perspectives and jointly assessing the long-term consequences of this decision. This collaborative approach not only provides support but also fosters a sense of connection during this process.
4. Choose a Reputable Provider
Choose a provider that adheres to the strict standards set by the Equity Release Council (ERC). The ERC is an industry body that sets standards and provides consumer protection for equity release. Research providers thoroughly and verify their credentials before proceeding.
Safeguarding Your Rights
As a homeowner, you are entitled to certain protections, and one of the most significant is the ‘no negative equity guarantee.‘ In fact, this guarantee is a fundamental component of any equity release contract. Essentially, it ensures that you will never owe more than the value of your property, acting as a safety net for your financial well-being. Moreover, it provides you with peace of mind and confidence, ultimately reassuring you about your financial future.
Our Advice
Equity release can seem like a simple solution. But awareness of potential downsides is essential. Hidden fees, rising interest rates, and impacts on inheritance are just a few things to consider. Specialist financial and legal advice can help you navigate these complexities and ensure you’re making the right choice. They can provide a comprehensive understanding of the legal and financial implications, help you compare different providers and products, and ensure you fully understand the terms of the contract.
As the ERC suggests, talk to your family, too, as they might have valuable insights. Furthermore, for additional information, advice, or a quotation, please don’t hesitate to contact us. We are always here to help.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.