Your home is probably your most important financial asset. But once you’ve paid off the mortgage, you’re sitting on a large amount of capital that is all tied up in your home. And with times being as uncertain as they are, that can be incredibly frustrating. So it’s no surprise that more and more people have been looking into equity release as an option. But what is equity release, and what does it look like in the modern market?

What is Equity Release?

The general concept of equity release is quite simple – it allows you to access the capital tied up in your property. You unlock the equity in your property and turn it into a cash lump sum. Because of the nature of it, equity release is only available to the older generation – with a minimum age limit of 55 years for most schemes. There are a number of different ways you can access equity release schemes, depending on your personal circumstances.

The 2 Types of Equity Release

The term equity release doesn’t have a single definition. This is because there are 2 different methods you can use to release the equity from your home, which involve taking out a lifetime mortgage, or selling all or part of your home.

Lifetime Mortgage: This is the most commonly seen option for equity release, they allow you to borrow a proportion of the value of your property with either the homeowner just paying the monthly interest, or with the interest rolling up. With interest roll up plans, the outstanding mortgage balance increases with compounding of the interest and you do need to be aware that this can seriously eat into the remain equity over time. You can apply for a lifetime mortgage if you are over 55, and you can only normally lend up to 60% of the value of the property.

Home Reversion: This is where you sell all or part of your property to a home reversion provider for either a lump sum, or regular instalments. You get to stay in your home as a tenant until you pass away, as long as you keep it properly maintained and insured. You, or your beneficiaries do not benefit from any future increases in house values, unless you reserve a share of the equity at the outset. You can normally take out a home reversion if you’re over 60 but with some lenders it’s 65.

Equity Release During Lockdown

Of course, many people have been feeling the financial strain of lockdown, and this has led them to look for other ways to fund their lifestyle during these challenging times. Lump sum equity release plans have been growing in popularity during lockdown, compared to the first 3 months of the year, according to research. In fact, lump sum plans accounted for 61.2% of plans across April and May.

The research also revealed something very interesting – there has been an increase in the younger age groups releasing equity in their property. According to the data, the number of plans taken out by 55-59 year olds rose by 4% in May, compared with the first 4 months of the year. Plans taken out by the 60-64 age group also rose by 3.5%, and the 65-69% age group rose by 5%. So overall, every age group saw an increase in taking out equity release plans, in order to provide a buffer while income is uncertain.

If you’re interested in finding out more about Equity Release as a way to provide you with a lump sum during these difficult times, then we are here to help. At Chilvester Financial we have advisers on hand who specialise in equity release and are happy to talk through your options and create a plan that suits your needs and your situation. If equity release is right for you, then we can guide you through the process and help find a plan that works for you. To find out more, just get in touch with us today for a free, no obligation consultation.

Hello, and welcome back to Part 2 of our series on common financial mistakes, and how to avoid them. In our last post, we talked about not having a financial plan, saving for yourself as well as your children, buying ‘too much house’, and forgetting that you are, in fact, mortal. If you’ve not read that post yet, you can do so by clicking here. These are all good basics to start with, but in this part, we’ll look as some slightly lesser-known mistakes that are still all-too common, and what you can do to avoid them.

Relying on BOMAD

Or in other words – the bank of Mum and Dad. It might seem like an odd thing to say to an adult, but the Bank of Mum and Dad is one of the biggest sources of funding for adult children in the UK. In fact, the BOMAD continues to be the prime mover in the UK housing market, and is the equivalent of a £5.7bn mortgage lender. 27% of all buyers will now receive help from friends or family, and the majority of that will come from parents. But don’t forget – someone is still ‘losing’ that money, so you should be careful that you aren’t causing financial problems for your parents by borrowing from them. If you are, make sure you’re clear on what the conditions for the money are, remember that one day you might become the bank of mum and dad, so you need to be planning for the future a little.

How to avoid this mistake

• Keep conversations with your parents about money open and honest. Understand their financial situation, and make sure they understand yours.
• Make sure you are all clear – is this a loan of a gift? This will stop any arguments over repayments (or lack thereof) later down the line.
• Start saving now – if you want to have children, then it’s your turn to be the Bank of Mum and Dad next.

Being Underinsured

We’ve talked a fair amount in the past about the importance of insurance, especially when it comes to life insurance, family cover or income protection. If something bad were to happen, odds are it’s going to cost someone something. The most common cost is not being able to work and losing all or part of your income. Needing to pay for care (or do it yourself) can be costly, but it can also be tempered with the relevant insurances. If you aren’t insured, or you are insured, but for a lower amount than would cover the costs, then this could all become very expensive for you in the future.

How to avoid this mistake

• Guestimate what it’s going to cost you or your family if you die, get ill, or are too sick to work.
• Take out the appropriate insurance policy to protect and cushion any such shocks
• Make sure you’ve taken into account some of the likely basics, like:
  • A mortgage for X years
  • Childcare costs to 18
  • Relocation costs
  • Whatever other financial shocks survivors are likely to go through

Not Understanding Your Own Cash Flow

If you’re not a business owner, then cash flow might seem like an alien concept. But just as a business need to keep an eye on its cash flow, so do you in your personal life. Even if you earn a lot of money, that doesn’t necessarily mean that your cash flow is healthy. After all, cash flow is all about what you earn vs what you spend, and making sure that more money is coming in than going out. If you have more money going out than coming in, you have a problem, no matter how big your income is.

How to avoid this mistake

• Create a budget detailing your incoming and outgoing cash each month
• Understand your burn rate (how much of your money do you burn each month? 10%, 50%, 101%?)
• Figure out how much of your paycheck you get to keep, otherwise known as your saving rate
• Stay on top of this each month, make changes if you see the outgoings creeping higher than the income.

Not Having Any Financial Goals

Whilst it’s not necessarily a bad thing to have no financial goals, if you don’t have any of these in your life, then you will have limited reasons to save or invest. Hence the reason you probably don’t have any savings. This means you potentially have no cushion when things where to go wrong. Without a goal in mind, you’re rudderless and just drifting through life – and might not have the funds you need if you were to choose a goal later on.

How to avoid this mistake

• Ask yourself some questions. Questions like:
  • What would you like to do that costs money? Travel, study, get married, buy a house?
  • When would you want to do those things?
  • When would you like work to become optional? When will you retire?
• Write the answers to these down, with a timeline and a ‘goal’ amount for each
• Now you can figure out the steps you need to take to achieve this.

That’s it for part 2! We hope some of these tips have been useful to you and have given you something to think about for your financial future. If you would like to know more about any of the above, or you would like to talk it through with a professional, just get in touch with our team today for more information.