Q. We are a retired couple with a mortgage free property worth around £700,000 but no money in the bank and only our state pension to live on. Friends and family have advised us to sell up and downsize to release equity to live from but we love our home. Are there any other options open to us to change us from being asset rich to cash rich instead?
A. This is a predicament many retired couples and singles alike find themselves in and many like you are reluctant to move to solve the problem. In short there are options other than moving although caution is needed when investigating such options. Equity release could help you to you access cash locked up in the value of your home without moving. One type of equity release offered is a lifetime mortgage – a long-term loan secured on your property, with no repayments to be made before the end of the plan. The loan and any interest on it is repaid in full, usually from the sale of your property, when you die or go into long-term care, subject to individual terms and conditions. A lifetime mortgage charges interest on the total amount of the loan including the interest that has already accumulated, so the amount owed will quickly increase. The borrowing rates are far higher for this type of loan compared to other mortgages. And because in most cases it rolls up, the effect of compounding can mean the debt accumulates in a comparatively short time. However, it is possible to limit the cost of the interest by borrowing in stages or drawing down debt as you need it. The most popular type of equity release is drawdown. Unless you need all the money in one go, this is the best option, so you can take the money in stages when you need it. The amount you can release will be dependent on your age. If this type of release would work best for you it’s to your advantage to agree a higher limit than the sum you think you require, as you don’t need to use all of it and applying for a second loan can be costly and difficult. Many schemes have minimum withdrawal amounts, although these can be quite small – in some cases as little as £2,000. The smaller the limit, the more flexibility borrowers have. Just be sure to read the small print before signing on the dotted line.