Come retirement age, many pensioners soon hit upon the realisation that cash is required more than ever. Being the longest holiday of one’s life and having more leisure time than ever, money can soon become in short supply. So what are the alternatives and do you have to worry about means tested benefits?
Other than the non-financial options such as downsizing, using one’s savings or investments, claiming any means tested benefits due, asking relatives for financial assistance etc there are still two further means by which people can remain in their current home.
These options are either equity release schemes or interest only mortgages in retirement. An equity release scheme works by releasing a tax free lump sum from the property, dependent upon the age of the youngest property owner and the value of the property. The interest charged by the equity release provider is added to the balance of the original amount borrowed. Therefore the balance grows over time, almost doubling every 10-11 years.
In contrast an interest only lifetime mortgage plan, such as the Halifax Retirement Home Plan will also achieve the aim of releasing tax free cash from the property. However, these schemes require there to be some form of regular repayment. This is usually the interest only element. As a consequence of the interest being repaid, the balance will always remain the same.
Let’s have a look in greater detail at more of the differences:
- Interest Only Lifetime Mortgage
- Usually commence at age 65
- Interest only repayments required
- Balance remains the same throughout
- Amount borrowed dependent upon income
- No drawdown facility available
- Less stringent property requirements
- Not SHIP authorised
- Equity Release Schemes
- Minimum age is 55
- NO monthly repayments required
- Balance increases with annual addition of interest
- Cash sum release based on age and property value
- Flexible drawdown schemes available
- Can have rigorous property requirements
- Schemes meet SHIP requirements
It is up to you to decide whether you wish to afford the monthly interest payment required for the interest only lifetime mortgage. Sometimes it is not the best option especially if you have to prove your disposable income. If you are also using the money to make up the monthly expenses then it can be difficult to have to pay out more money. You would use the money a lot quicker because of the need to repay the interest, even though you do not have to repay the principle amount right away.
With other lifetime mortgage equity release options you have no monthly payment. It allows you to use the money free and clear for your lifetime without worry that your expenses will amount to more than the income you have.
The key to plans such as lifetime mortgages and interest only Halifax plans, is to remember why you wish to take the money out and what your retirement is meant to be like. If you hope to live for a long time and see great grandchildren, then spending a lot of money at once is going to leave you with nothing later on. You may even encounter a period of needing to repay the mortgage before you move on.
There is a non mortgage option available to you that should also be discussed with retirement equity release. The more armed you are with information the better you can make a decision.
Home Reversion is an Alternative
Home reversion is not as prevalent today as it was years ago. Many companies have stopped providing the scheme because it was attacked in media amid confusion of homeowners. Still there are some companies willing to offer this choice where you do not have to worry about a mortgage repayment or interest.
The main disadvantage is the sale of your home. You sell your home in full or in part to a home equity release provider. This provider will allow you to remain rent free until you move out or die. You also get tax free cash. It only works for those who are aged 65 or older, and wish to sell their home.
Much consideration should be given as to which scheme is taken out and done so for the right reasons. Always seek the advice of an independent financial advisor who not only can offer advice on equity release, but also mortgages. Obtaining advice from such an impartial specialist mortgage broker and not from a company portraying themselves as just a specialist equity release broker, could pay dividends in the long run as well as save on the means tested benefits.