With a surprising 33% of 60-65 year olds in the UK relying solely on the state pension for income, what are the options for those who don’t have final salary or private pension pots?
The answer lies in housing wealth. There’s more than £750bn in un-mortgaged property among homeowners over 65 – that’s an enormous reserve of cash which can be released through a scheme called equity release.
Technically, equity release can be considered by anyone over the age of 55, but they’re most popular among the over-60s – those who are considering their future and trying to get a handle on their financial situation before retirement. There are two different options available – the Lifetime Mortgage (which is available to anyone over the age of 55) and the Home Reversion plan (which is solely for the over-65s)
If you’re over 60 and thinking about freeing up some of the cash tied up in your property to enjoy a more comfortable retirement, pay off debts or go on a once-in-a-lifetime holiday, read on to find out more about equity release.
What exactly is equity release for 60+ year olds?
To put it simply, equity release is when money tied up in your property is released as a loan. These schemes can only be entered into by homeowners who have already paid off their mortgage (or who will be able to pay the remainder off with the loan itself). Homeowners don’t need to sell their property, or even move out, and will be guaranteed a stable and secure home for the rest of their lives.
Equity release for under 60s
Equity release was designed for older homeowners, as a way for them to tap into all that money they have tied up in their properties after their mortgage has been paid off. Many providers of these schemes have particularly strict lending criteria, which does include some minimum and maximum age limits.
The lower limit varies between providers, but it’s usually 55 or 60 years old. The upper limits also vary – some providers have no upper age limit at all, while others state 95 as their maximum limit.
Your age will also dictate what percentage of your property you can borrow – you’ll be able to borrow more as you get older. If you (and your partner) are aged 65, you’ll typically be able to borrow up to 30% of the value of your home, but if you’re older, you might be able to borrow up to 50%.
Different types of equity release
As mentioned earlier, there are two types of equity release – the Lifetime Mortgage and the Home Reversion plan. Here are the main differences between the two:
Lifetime Mortgage (available to over-55s or over-60s, depending on the plan provider) – This method allows you to extract funds from your property in a single lump sump, or in smaller regular amounts over a period agreed with your provider. This option allows you to remain the owner of your home, and you’ll be able to stay in your property for the rest of your life, rent-free. The interest on the loan can be fixed or rolled up, and when you die or move out of the home into permanent care, it’s paid off by your estate.
Home Reversion (available to over-65s only) – This approach involves the provider of the plan purchasing all or a percentage of your property – but don’t worry! You’ll still own the property and be able to live there rent-free. At the end of the plan, the property is sold off and the proceeds distributed according to the ownership proportions. The reversion company can’t sell the property until you and your partner die or move into long-term care. It’s worth bearing in mind that the company might need to wait 10, 20 or 30 years before they can sell the property, which can impact your chances of receiving the full market value of the home.
Why the age limit?
It’s important to remember that these equity release schemes are a product just like anything else, and providers are always looking to make some kind of profit. Pensioners at the ‘younger’ end of the scale (between 55 and 65, for example) might only be offered 25% of the value of their property, purely because their life expectancy is longer and the company will need to wait much longer before they see the profit. Pensioners aged 75+ could be able to free up as much as 50% of the value of their property, because their life expectancy is naturally shorter and the company won’t be faced with a 30+ year wait for their profit.
Things to consider before opting for equity release
While freeing up funds to use in retirement might sound great to some, there are some caveats which need to be considered – the first being early death. If the homeowner were to die just a few years after taking out the plan, they’ve essentially sold a huge share (or even the full amount) in their house for much less than the market value. Some schemes do offer a rebate to the family after early death, but it’s worth double-checking. Certain schemes can also be made invalid if you have to enter permanent care.
Having an equity release scheme active could also increase the amount of income tax you pay. The original cash is paid out tax-free, but if the money is used to generate further income (setting up a new business, for example), income tax might need to be paid.
There are also certain restrictions on living arrangements that can come into play when an equity release scheme is active. Some home reversion plans stipulate that lodgers or friends cannot live in the property – they must sign away their rights to the property if the homeowner was to die. The Government’s Money Advice Service has a great leaflet available with further information.