Using your home to fund retirement
When planning for retirement, it often means bringing together different income streams to suit you; rarely is your retirement income just from your pension. You might also be considering how to use your savings and investments, for example. One way to boost income in retirement that’s growing in popularity is through using property.
It’s easy to see why; property prices have increased significantly over the last few decades. For many retirees, their home will be one of the largest assets they own. Combine this with a retirement that is becoming longer and more active, it’s natural that some will want to access the wealth that’s tied up in bricks and mortar.
The rise in property prices
Going back 30 years highlights how astronomically property prices have increased.
According to figures from Nationwide, the average property in the UK during the first quarter of 1989 was £59,534. Fast forward three decades and it’s now £212,696. That’s an increase of 257%, far beating the returns you could expect to see from investments.
Even over the last 10 years, following the 2008 financial crisis, house prices have continued to climb overall. In 2009, the average UK property cost £149,709, representing an increase of 42% in just a decade.
Of course, whilst you may have technically made a profit on rising property prices, this is often inaccessible, especially if it’s also your home. As you plan for retirement, this value can be extremely attractive, but how do you make use of it? You essentially have two main options, downsize, or use an Equity Release product.
Downsizing is a simple option, but it can be costly and may not be suited to your goals.
Selling your home and purchasing a new one that is cheaper means you can use the difference to fund your retirement lifestyle. You don’t have to worry about paying the money back, it’s yours, but you should keep in mind how long the lump sum will last and how to get the most out of it.
However, there are a few potential drawbacks here. The first is that you don’t get to keep all the profit you make on the sale of your home in many cases. You may need to pay Stamp Duty depending on the value of the property. Homes valued under £125,000 are not liable for Stamp Duty, above this amount the standard rate ranges from 2% to 12%. There are also other costs associated with buying and selling a home to factor in, such as surveys and conveyancing fees.
What’s more, you simply may not want to move home. Perhaps moving to a smaller property isn’t practical, you love the local area, or you have an emotional attachment to your home. There are many reasons why downsizing may not be an option that’s attractive.
An alternative option is Equity Release. In some cases, this can help you unlock some of the wealth tied up in property without having to move. It’s a route than more retirees are taking.
According to figures published by the Equity Release Council, 2018 saw £3.94 billion of lending through Equity Release, with the amount growing by an average of 7.1% each quarter since 2016. There are several reasons for the pace of growth. At the top is rising property prices and longer retirements. But more products in the market and flexibility for customers is also having an impact.
There are two different types of Equity release products; the most popular is a Lifetime Mortgage. This is where you take out a mortgage secured against your property but retain ownership and are still able to live in it. Typically, the interest payments are rolled up and are payable either when you die or move into long-term care. This option can provide you with either a lump sum or several payments to help fulfil retirement costs.
With more products on the market, there are now more options to homeowners than previously. For example, you can choose to make interest payments, ring-fence a portion of your home to pass on to loved ones as an inheritance and have a no negative equity guarantee.
There are drawbacks to consider before you decide to proceed with Equity Release. For example, it may limit your ability to move in the future if you choose to and reduce the inheritance you leave behind for loved ones. If you’re considering using an Equity Release product, look at the alternatives alongside it too, allowing you to find a way to fund the retirement you’re looking forward to in a way that suits your priorities.
When planning for retirement, you should take a look at all your assets and how they could be used to create an income. For some, using wealth locked in property could be the right answer. If you’d like to discuss your options, please contact us.
Please note: Equity release will reduce the value of your estate and can affect your eligibility for means tested benefits.
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