You may have seen articles in the national press about how people in retirement who are ‘asset rich’ but ‘cash poor’ – i.e. they own a valuable property but have a relatively low income – can boost their income by releasing some of the equity in their property.
Maybe your house needs unexpected and expensive repairs or perhaps you want a better standard of living in retirement or to provide in-home care to maintain independent living? There are several different equity release schemes available on the market so you need to seek professional financial advice before deciding whether equity release is right for you.
With most equity release schemes you will be borrowing money against the value of your home and this money is repaid when your house is sold – usually when you die or move to a care home. These schemes work on the principle that you will be lent a proportion of your home’s value and in return the lender will share in the sale proceeds.
There is no doubt that for many people, the most valuable part of their estate is their house, which has increased significantly in value at a time when retirement income in general has not done so. In a recent study by the Equity Release Council, analysis of Land Registry and Office of National Statistics data showed that house prices have increased nearly twice as fast as the average retiree’s income over the past 15 years.
The Equity Release Council’s calculations show that, since 1997, house prices have grown by 91% or £109,399 in real terms, from £120,211 to £229,610. In contrast, the average pensioner’s income has risen by 46%, equivalent to an extra £6,343 in their annual budgets. This has taken their average gross income from £13,786 to £20,129.
A further issue in the current low interest rate environment is that pensioners who used to be able to rely on generating cash from their deposit accounts are finding that they cannot even keep up with the inflation rate and their savings are actually earning a negative real rate of return. (See our blog ‘What is inflation doing to your savings?’)
Nigel Waterson, Chairman of The Equity Release Council, has comment on the research as follows:
“What we are seeing is a new reality emerging in terms of retirement income as people increasingly look to pensions and annuities, rather than investments, to finance their later years. However, the uncertainty surrounding many funds means that people’s property is very often their biggest and most secure financial asset, with a far greater return on their original investment.
“Particularly if they bought their homes some time ago, many will have a large amount of equity tied up in their property that can relieve the pressure on their retirement income and help with additional expenses. In many cases, equity release can offer retirees an alternative to selling their property – one that preserves their domestic comfort as well as their attachment to the place they call home.
“Whether choosing a lump sum or regular monthly payments, equity release customers can enjoy the relief of an extra source of retirement income, safe in the knowledge they are free to remain in their homes for the rest of their lives, if they choose to, and will never owe more than the property is worth.”
Equity release may not be suitable for your needs. Please obtain specialist independent advice and always ask for an Illustration.