The cost of living crisis has hardly been out of the headlines in 2022. In October, the Office of National Statistics revealed that inflation, which measures the rising cost of goods and services, stood at 10.1% in September 2022.

While you may have noticed the effects of inflation on your expenditure, there is one group in society who could be hit hard by the soaring cost of living: pensioners. Many are having to increase their income to make ends meet, which in turn, means they run the risk of depleting their pension pot earlier than expected.

As many pensioners live in homes that have risen in value over the years, many could now be looking to release cash from their property to boost their income or improve their standard of living. According to data from the Equity Release Council, in Q2 of 2022, more than 200 people every day released cash from their home. In total, £1.6 billion in property wealth was withdrawn.

If you have clients who are considering equity release, read on to discover what it is and the pros and cons of using it.

Broadly, there are two types of equity release

To be eligible for equity release, your client must be over the age of 55 and own the property, although they may be able to take it if they still have a regular mortgage.  Generally speaking, there are two types of equity release, which are:

• Lifetime mortgage – this allows your client to borrow between 55% and 60% of their property’s value and continue living in it. The amount borrowed typically depends on their age and the value of their home. While your client can make monthly interest payments if they prefer, interest usually “rolls up” over time and is paid when the property is sold.
• Home reversion plans – your client can sell between 25% and 100% of their property to a home reversion provider. When the property is later sold, the provider receives the value of their share of the property at full market value. Your client will not receive full market value when they sell to the provider, as the latter will protect itself against the property falling in value and selling costs.

One advantage of equity release is that your client does not typically have to wait long for their money once their application is approved. It can be taken as a one-off lump sum or as a series of smaller amounts, which could help fund home improvements, buy a car, pay for long-term care or create an income.

The money you receive is typically tax-free

A major benefit of equity release is that the money your client receives is tax-free because it’s a loan. This means that if they use it to boost their income, it will not typically increase your client’s liability to Income Tax.

If they use the money to help loved ones financially, it could also help reduce or even negate any exposure to Inheritance Tax (IHT). As a result, your client may be able to leave more money to loved ones.

That said, care should be taken, and your client should speak to a financial planner to ensure it’s the right strategy for them. With this in mind, let’s now consider reasons why your client may need to think carefully before taking equity release.

The amount owed could increase significantly

Interest rates with lifetime mortgages may be higher than standard mortgage rates, as the lender could have to wait a long time before the property is sold. If the interest is rolled up, the debt may become higher than the original amount borrowed, which could mean the amount your client leaves to loved ones when they die is reduced.

There is some good news though, as your client may be able to overcome this by paying off the interest on a monthly basis.

Another consideration they should be mindful of is the possible effect equity release may have on their ability to claim means tested state benefits. Finally, if your client does decide to repay all or some of the loan, maybe because they have received an inheritance, they could face an early repayment charge.

Ensure your client looks for the Equity Release Council logo

If your client is interested in equity release, they should always use providers and financial advisers who are members of the Equity Release Council. It was established to ensure that those who use equity release are not disadvantaged and can live in the property until they die or go into permanent care.

Lifetime mortgages that are approved by the council could also be transferred to another property if your client moves home.

Get in touch

If you or your client would like to discuss equity release further, please contact us on hello@ardentuk.com or call 01904 655 330.  As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you will have peace of mind that your clients 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. The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.