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Is Equity Release The Best Way To Fund Your Retirement?

September 29th, 2008

Britain is getting older. Retirement ages are rising and so is life expectancy. Against this background, it’s no surprise that there are more mortgage options for pensioners than ever before, too.


As well as conventional mortgages – where you pay back money – there are also products such as ‘lifetime mortgages’, which allow pensioners to receive payments based on the value of their home and don’t have to be repaid until the home is sold.


This fast-growing type area of finance is known as equity release – borrowing against the value of your own home. In this article I’ll explain what the options are and highlight some alternative approaches you might wish to consider.
What’s Equity Release?


There are two main types of equity release scheme available in the UK:


         Lifetime mortgages

         Home reversion
Lifetime Mortgages

Lifetime mortgages are by far the most popular (and flexible) and allow you to borrow money against the equity in your home. This can be paid to you in a lump sum, as a regular income, or on demand over a number of years.


The money you have borrowed accrues interest continually but you don’t have to repay anything until the property is sold.
Home Reversion

Home reversion schemes are a little different. Instead of borrowing money, you sell a fixed share of your home to the home reversion scheme provider. You then continue living in it and remain responsible for its upkeep.


When the time comes to sell the home, the home reversion company is paid their fixed share of the sale price – whatever that might be. Although this approach to equity release mortgages can sound attractive, it isn’t as popular as lifetime mortgages. One reason for this is poor value; to protect their eventual profit, the home reversion company will purchase their share of your home at much less than market price.
Alternatives to Equity Release


Although equity release is increasingly popular, it is a drastic step and can be expensive.


For this reasons, most reputable financial advisers will make sure there is nothing else you can do to improve your finances before recommending that you enter into an equity release scheme.


Some of the other measures you might want to consider first are:


         Ensure you are claiming all of the state benefits you are entitled to

         Consider downsizing your home or moving to a cheaper area – this can lower your bills and leave you with some cash left over to improve your lifestyle

         Check whether you can get a council grant for any major maintenance work or improvements to your home

         Do you have savings or investments you could use to increase your income – a financial adviser will be able to help you work out the possibilities

         Are you receiving all of the pensions you are entitled to? Do you have any lost pensions from old jobs that you could track down?


If you’re worried about money in your retirement, your first step should be to assess your current position. The FSA (the financial services regulator) runs an excellent website containing interactive guides to managing your finances. These are designed to be simple to use and will help you understand exactly where you stand at the moment.

Tags: interactive guides to managing your finances | interactive guides to managing your finances | mortgage options for pensioners | mortgage options for pensioners | equity release mortgages | equity release mortgages