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Basics of how to get money out of your house equity
Equity release gives you the opportunity to release some of the money which is currently tied up in your home, for example if your home is worth £150,000 you may be able to release £100,000 of this and continue to remain in your home. Sound too good to be true? Well for thousands of households it provides the ideal opportunity to release some valuable equity which can then be used to spend on anything you want, however it can also be used to invest and provide a pot of money to draw on upon retirement.
Life time mortgage equity release or Home Reversion scheme - Which one for me?
Equity release is not as much of a complex option as it sounds, basically there are two main types of scheme, these are lifetime mortgages and home reversion schemes. A lifetime mortgage gives you the opportunity to release a proportion of the value of your home in a lump sum. When the applicant moves into a care home or passes away, the amount taken as equity plus interest must be repaid to the company. Therefore this limits the amount of equity you can borrow as the sale of the property must cover this loan amount.
A Home Reversion Scheme gives you the opportunity to sell either the full equity of the property or a proportion in exchange for a cash lump sum. The market value of the property will not be given as part of such a scheme, instead a much reduced amount will be offered, this is to make the scheme stack up financially from the chosen company.
The actual overall cost of the schemes are detailed further below: (example)
With a Lifetime Mortgage, if you opt to release £50,000. Interest will accumulate on this amount for the rest of your life. If the interest rate on your lifetime mortgage is fixed at 6.39%. After 5 years, you’ll owe the lender over £68,000. After 15 years, this would compound to almost £127,000, in some cases the amount you may owe will be more than the value of the property and as such this option needs careful consideration. There are schemes out there which guarantee that you will never be in a negative equity position, these options are invaluable as the longer you live the more interest will be accumulated on the equity release amount.
A Home Reversion Scheme might give you the opportunity to release up to 40% of the value of your property as a lump sum. But to release 40%, you’ll actually have to sell the full 100% share in your home to the company.
In this case, if your property is worth £100,000, the maximum amount which you could release will be no more than £40,000. Because you no longer have a share in the property it will be passed back to the company once you pass.
Should I just move houses into a smaller place
What can be a better option is to look at your current home and ask yourself if you could happily live in a smaller property which would suit your needs. If the answer is yes then it may be more beneficial to opt to downsize your home and free up the equity in your property. Many opt to downsize their large family home into a smaller bungalow or to a generally smaller and more manageable house.
There are many benefits from downsizing and if you are lucky enough to have a property which is now worth a considerable sum, you may be left over with a large amount which could be a ‘nest egg’ for your retirement.
An example of this would be living in a 3 bedroom family home near to schools and general amenities. This property may be worth £300,000, however as well as being a desirable home, in later years it may also be one which requires your time to keep clean and tidy and have a large garden. If you considered moving out of the town or even just around the corner to a property which is smaller and more manageable for say £150,000, this will allow you to bank the remaining £150,000 equity.
What it comes down to is if you are set on living in your current home for the rest of your life, then an equity release scheme would provide you with that additional equity for your retirement. If you would are not tied to your current home it may be a better option to phone the estate agents and get your property on the market.
Remember also that you can release equity not just from your home but also from your pension scheme. At present you can take up to 25% of your overall pension fund as a lump sum payment, this may give you the equity you require to fall back on if ever required or to go on holiday, purchase a car or to simply enjoy over the coming years. What’s more the 25% is totally tax free so you will receive every penny.
You are not able to release any amount greater than 25% of the overall pension fund. The remaining 75% must be used as to provide a pension for your retirement, this may seem a constraint, however it does ensure that all those years of paying into a pension scheme aren’t blown in one go on a Ferrari or Yacht in the Costa del Sol.