Question: My husband and I are retiring next year and we don’t think that between us, our pensions will provide us with enough income to keep up with our lifestyle. We don’t need a big top-up but we’re considering equity release as we paid off our mortgage several years ago. We’ve heard that you can get a monthly income from equity release now? Should we do that or is it better to take a lump sum?
Age Partnership’s Andrew Morris replies:
“With pension incomes falling and increasing household bills, we are finding more customers are looking at ways to bridge the deficit between income and outgoings. One of the first things we need to understand is whether the shortfall is for the rest of your lives or for a set amount of time, for example, until your state pension starts. This will help shape the options you should consider.
If the shortfall is for a set period of time then equity release may be a suitable solution and should be considered alongside other options like any other savings or assets that you could access. But if the shortfall is for the rest of your life, then equity release may not provide enough money to solve the problem. In this case, downsizing or perhaps taking in a lodger may be a more suitable solution.
Should you wish to explore equity release, I’ll outline the options available to you and the questions you should ask. The most common type of equity release plan is a lifetime mortgage and with this type of plan there is the option to take the money you require as an upfront lump sum or to take the money on a drawdown basis. This is where an initial lump sum is released and then further withdrawals can be taken in the future from a pre-agreed facility.
This gives you the flexibility to take money as and when needed. Debit interest is only accrued on money once it has been released, either initially or from the reserve. So with drawdown plans you don’t build up interest on money that you don’t need right now. As you only want a monthly top up, a lump sum alone would appear to be the wrong option, and a drawdown plan may be more suitable as you can release money as and when you need it.
You would need to release a minimum of at least £10,000 at the start and the minimum drawdown amount usually ranges between £1,000 – £5,000 per-withdrawal. These minimum amounts may be too large for your needs and may mean accruing debit interest on money you are not using – which wouldn’t be something I would advise.
You’re correct in your reference to a new type of equity release product which provides a regular monthly income, it’s called an income lifetime mortgage. You can choose to take the income for a fixed term, typically between 10 to 25 years, with a minimum initial cash sum – £2,500 is typical. The level of income available and the term available will be dependent upon property value and your age. Income withdrawals usually start at £200 per month and are therefore smaller than the minimum withdrawal on some drawdown options. This can result in less interest being built up over the long term.
It’s worth noting though that the interest rate will be set at the prevailing rates at the time you draw down, so unlike a lump sum plan you won’t know what interest rate will apply to the income until it is taken. With both of these options the money released is secured against your home and debit interest is accrued on the borrowing. Interest or capital payments are usually allowable, but if they are not made then the interest is compounded. Also, it is worth noting that all plans which meet Equity Release Council product standards offer a no negative equity guarantee, which means you can’t pass on debt to your estate.
In summary, a drawdown option or an income plan may be suitable but it would be dependent on your personal circumstances, how much you need each month and for what period of time. The traditional lump sum would appear not to meet your needs as it will accrue too much debit interest on money you are not using. I recommend speaking to a qualified equity release adviser to discuss your options.”
Will Kirkman of This is Money adds:
“While equity release is right for some, it comes with some significant drawbacks that you should be aware of, the biggest being the compound interest that comes with a roll-up plan. As there are no monthly repayments, the interest is added to your loan, meaning that charges compound over the years and can eat into your equity significantly, which can leave little to pay for care in later life or to pass on to children.
For example, on an average rate of 4.91% over a 20-year period a £30,000 equity release loan can compound into a debt of £79,933 – add 10 years to that, and you will owe £130,476 to the lender. As Andrew explained above, most equity release loans now carry a no negative equity guarantee, meaning the borrower will never owe more than the value of their home. Check that the provider is a registered member of the Equity Release Council to ensure that this applies.
As Andrew also mentioned, using a drawdown facility means you will only pay interest on what you’ve taken out. Speaking to an adviser will help with the sums, but it also pays to do as much research yourself as you can. If you’re looking to boost your retirement income, often downsizing can be a preferable alternative to equity release. This way you get a lump sum, but also lower your monthly outgoings. On top of this, your inheritance is protected.”
[Source: Mail Online, 17 October 2019]