According to Legal & General’s Equity Economy Report, £1 in every £90 spent by retirees is funded by equity release. Furthermore, in 2021 a record £4.8 billion was released from the value of homes.
The report also predicted that the equity release market would surpass £12 billion by 2030, as retirees use the value of their property to fund day-to-day living as well as major purchases.
This dovetails into research carried out by Canada Life, which found that 30% of those with private pensions intend to release equity from their home as part of their financial strategy. Surprisingly perhaps, it also revealed that those with pension pots valued at more than £200,000 were more likely to release equity from their home.
Additionally, those on incomes of £50,000 or more likely to include it as part of their long-term retirement plan. Read on to discover what equity release is, how it works and reasons you may want to consider it.
Equity release allows over-55s to release cash from their home
Those who own their home can use equity release to take cash out of their property without the need to move. Typically, this is done using a “lifetime mortgage”, which allows you to borrow money against the value of your property.
The amount borrowed is then repaid from the sale of your property when you go into long-term care or die. While interest is typically charged, it’s not normally paid monthly.
Instead, the interest “rolls up” over time paid when the property is sold. That said, you may be able to opt for monthly interest payments if you’d prefer.
To be eligible for equity release, you must be over the age of 55 and own the property. In some situations, you may be able to take equity release while you still have a mortgage on your home.
As you can see, if you are looking to turn the equity that’s built up in your home into useable cash, equity release might be a solution. With that in mind, let’s now consider five of the most common reasons to use it.
1. Gift to loved ones
Gifting to family or friends was also a popular reason according to Canada Life, with 15% choosing to release equity for this purpose. A key reason for this could be that it allows you to give the money built up in your property at a time they could need it most.
For example, if they have a young family, they might feel the benefits of your wealth now when expenditure could be high. Leaving them the equity that’s in your home when you die may mean the money is passed down when your children are older and more financially secure, meaning they don’t need it as much.
Furthermore, as equity release typically forms a debt against your estate, it might also be a shrewd way to reduce or negate an Inheritance Tax liability. Always speak to a financial planner to confirm whether this would be the best strategy for you.
2. To clear a mortgage
According to another piece of research by Canada Life, 50% of those who applied for equity release in the first half of 2022 used it to clear their existing mortgage. Doing this might mean you have greater disposable income in retirement, which could help you better afford your day-to-day living costs.
This could help you enjoy, and maintain, a better standard of living when you have finished work.
3. Fund a big purchase
Canada Life’s research also shows that many retirees are using equity release to make substantial one-off purchases. It reveals that 38% people who took equity release used it to make home improvement, with 1 in 7 using it to pay for a holiday.
More than 1 in 10 (12%) used it to buy property and 10% bought a new car. Interestingly, researchers for L&G also found that 17% of those who took equity released used it to cover medical expenses, with 16% using their equity to clear personal debts.
4. Boost pension income
According to the Office for National Statistics, inflation reached 9.9% for August, the highest level in 40 years. Small surprise then, that L&G’s Equity Economy Report suggests that 1 in 5 are looking to use their property to boost their income as the cost of living soars.
That said, using money that’s tied up in your property’s value to deal with the effects of inflation isn’t the only reason. According to L&G, more than one-third of those who are considering equity release in the future are motivated by the desire to have a more comfortable retirement.
5. Pay for care costs
According to L&G, 16% of those who took equity release used it to adapt their homes for mobility needs, while 8% paid for care-related expenses. If you are concerned about the cost of long-term care, equity release might be a solution you want to consider.
Get in touch
If you’re thinking about equity release, we would be happy to discuss whether it’s the right thing for you, and what your options might be. If you would like to chat, please contact us on hello@ardentuk.com or call 01904 655 330.
As we are an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can have peace of mind that you will receive excellent advice and the highest quality service.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits. Your home may be repossessed if you do not keep up repayments on a loan secured on it.
Think carefully before securing other debts against your home.
