How does home equity release work?
There are two kinds of equity release plans:
1. The “lifetime mortgage" (for those aged 55+): you take out a mortgage on your home, while still owning it and living there. The loan and any interest are paid back when you pass away, or when you move into long-term care. This is the most popular form of equity release.
2. The “home reversion” (for those aged 60+): you sell a part of your home in return for a lump sum or regular payments. You can continue living there, rent-free, until you pass away. At the end of the plan, your home is sold, and the money is shared between the home reversion provider and any other beneficiaries.
Potential Risks and Considerations
Accrued interest and compound interest can significantly reduce the inheritance available to beneficiaries.
Impact on means-tested benefits or entitlements, as releasing equity may affect eligibility for certain state benefits.
Consideration of future housing needs and potential impacts on long-term financial planning
Alternatives to Home Equity Release
Downsizing to a smaller property to release equity without the need for a specialized financial product.
Exploring other sources of income or financial support, such as pensions, savings, or investments.
Before you go for equity release, bear in mind:
A lifetime mortgage is often more expensive than your regular mortgage. The amount that can be released is usually up to 60% of the value of your home – and what you can take out varies depending on your age. The ‘no negative equity guarantee’ means that even if you don’t have enough in your estate to cover the loan, once your property is sold and all fees paid, neither you nor your estate is liable to make up costs
Conclusion
understanding home equity release is crucial for UK homeowners considering their financial options in retirement. While it can offer valuable benefits, it's essential to carefully weigh the potential risks and consider alternatives before making a decision. The Pie Tax App and expert tax assistants are available to provide personalized guidance and support throughout the home equity release process, ensuring homeowners make informed choices aligned with their financial goals and circumstances.
FAQs (Frequently Asked Questions)
Will I still own my home if I opt for home equity release?
Yes, with certain home equity release products such as lifetime mortgages, you retain ownership of your home. However, with home reversion plans, you may sell part or all of your property to a reversion company.
How will home equity release impact my taxes?
The proceeds from home equity release are typically tax-free. However, there may be tax implications if you invest the funds or use them to generate income. It's advisable to consult with a tax advisor for personalized guidance.
Can I still move house if I have a home equity release plan?
Yes, you can typically move house with certain home equity release products, although there may be restrictions or additional considerations. It's essential to review the terms of your plan and consult with your provider before making any decisions.
What happens if I outlive the terms of my home equity release plan?
If you outlive the terms of your home equity release plan, the property will be sold, and the proceeds will be used to repay the loan or reversion company. Any remaining equity will be passed on to your beneficiaries.
Will home equity release affect my eligibility for means-tested benefits?
Yes, accessing home equity through release schemes may affect your eligibility for means-tested benefits, as it could increase your overall assets or income. It's advisable to seek advice from a financial advisor to understand the potential implications.
