Should you unlock your property wealth to fund retirement?

More than half of UK savers do not expect to have enough to retire on, meaning more people could be forced to use their property wealth for an income boost.

This typically involves equity release plans, which enable homeowners to exchange some of the home equity for tax-free cash payments.

Insurance firm LV= found that almost six in 10 (58%) non-retired UK adults aren’t confident they will have saved enough for a comfortable retirement, and that 39% would consider using property wealth as a source of retirement income.

While equity release may feel attractive, and can allow you to stay in your home and provide a cash boost in retirement, there are major drawbacks to consider.

Lucie Spencer, partner at wealth manager and financial planning firm Evelyn Partners, said: “Equity release may not be the right approach for everyone, and it could be that it is more costly than drawing down other assets, so should be considered alongside other options.”

What is equity release?

Equity release is a way of freeing up the equity you’ve built up in a home in exchange for tax-free cash.

Equity is the part of a property you own. If you have a mortgage, the equity is the difference between your home’s current market value and what’s left to pay on the mortgage.

For example, if your home is worth £300,000 and you have £50,000 left to pay on your mortgage, your equity is £250,000.

Equity released from a property can be taken as a lump sum, smaller withdrawals over time or a mixture of both.

Typically, equity release products are only available to those aged 55 and over.

By releasing equity from your home, you’re taking out a loan which has to be paid back with interest added on top, either when you die or when you move into a care home and your property is sold.

There are two different types of equity release: a lifetime mortgage and a Home Reversion Plan.

Lifetime mortgages are more common and usually have a fixed rate of interest applied for the life of the loan. When you die or move into care, the home is sold to repay the loan and any leftover money goes to your beneficiaries.

Through a Home Reversion Plan, you sell a percentage of your home in return for a lump sum. When your property is sold, the equity release company receives their percentage and the remaining balance is paid to the estate.

Should you use your property for retirement income?

You may want to use equity from your property to fund retirement. Or maybe you want to gift money to a loved one.

But, there are pros and cons to consider.

Pros

Most lifetime mortgages don’t require monthly repayments, which means the loan and any additional interest don’t have to be repaid until you die or move into a care home.

Some lifetime mortgages let you make monthly repayments if you want to keep the overall balance of the loan and interest down and lower the eventual bill.

Equity release can also lower the inheritance tax (IHT) bill for your beneficiaries as you are reducing the size of your estate.

One major advantage to equity release is that you get to stay in your home.

Spencer, from Evelyn Partners, said: “You can stay in your family house for longer and use the funds to spend as you wish to, for example improving your lifestyle.

“You don’t need to release everything in one go and can opt to take smaller sums.”

Cons

Borrowing against your property can see interest build up significantly over time, especially if you take out a loan earlier in your retirement, meaning your beneficiaries are left with less or you don’t have enough to pay for care.

Spencer said: “The whole property could end up being owed [to the equity release company] once interest has been rolled up and the debt can increase substantially due to compounding [interest] which could significantly impact the amount of assets you leave behind to children or other family members.”

Some equity release products come with a ‘no negative equity guarantee’ – which means your estate will never owe more than the property is worth when sold. It’s worth finding out if a product you’re looking at has one of these.

Another drawback to equity release products is that some come with early repayment charges, so if you want to pay off a bit of the loan early, you’ll have to pay a fee.

Taking out equity release can also impact your eligibility for means-tested benefits which are based on your income, such as Pension Credit.

Having to pay for equity release could be a shock to beneficiaries upon your death as well.

Spencer said: “I would really stress that [you should] involve the family members that are going to be dealing with your estate or benefitting from your estate when you pass away.

“Most of the complaints [we notice around] equity release are when the kids don’t know [it’s been taken out].”

Meanwhile, some equity release companies will attach certain conditions or rules to letting you take out equity on your home such as not smoking in the property or repainting the home.

Spencer said: “Because, effectively, you’ve signed over a chunk of your house to them, and even though it’s still your house, they can put provisos on it to keep it up to a [certain] standard to make sure they get their money back.”

Spencer advised those considering equity release to take professional advice from a Financial Conduct Authority-authorised financial advisor.

She added: “I’d strongly recommend doing so with an adviser who is a member of the Society of Later Life Advisers, who has specialist expertise in this area.”

What are the alternatives?

Downsizing

Downsizing from a more expensive house to a cheaper one can free up equity and could also lead to lower council tax, energy, or other household bills.

You will have to factor in the cost of moving home though, including conveyancing and survey costs, as well as removal company and estate agent fees.

Spencer said: “A lot of clients prefer it [downsizing] because they’re not running the risk of high interest charges clocking up.

“They know their family is still going to inherit the estate and all of the money is still within the estate.”

Retirement interest-only (RIO) mortgages

These types of mortgages are generally designed for those aged 50 and over, and work like other interest-only mortgages where you pay off the interest each month and then pay off the principal loan when you sell your home.

They can be a cheaper alternative to lifetime mortgages because interest isn’t allowed to grow each month, leaving you with a bigger balance when the home is sold.

“It’s not like where the interest rolls up and you can lose the entire value of your house,” said Spencer.

You can also use the money gained from the loan as a gift to a loved one and if you die more than seven years after making it, it will fall outside your estate for IHT purposes, Spencer explained.