Equity Release and the Possible Impact on Benefits
Equity release and the possible impact on benefits: if you are claiming means-tested benefits that provide you with enough money to pay the bills and pay for essential expenses, the last thing you want to do is take out an equity release mortgage that puts a stop to these benefits, and end up in a tricky financial situation that you cannot escape from.
Fortunately, not every equity release scheme takes away your entitlement to benefits from the state, but some do, so it is important to choose a plan and a lender that facilitate your benefits income.
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What is Equity Release?
If you are new to equity release, allow us to explain how the process works. You are offered a loan secured against your property, which means an equity release lender will offer you money based on how much your home could offer them in terms of value.
A high loan-to-value ratio means you are receiving a good amount of money compared to how much your home is worth, and the opposite is true for a low loan-to-value ratio.
The loan that you are offered is given either as an equity release lump sum or in monthly instalments, depending on the plan you have selected and the policy of your equity release provider. Sometimes, you can choose to withdraw the money as and when you need it.
In terms of making repayments, this is not necessary, as the money is given back to the lender when they sell your property after you die or move into long-term care.
Don’t worry about your property decreasing in value, as lenders are prepared for this, and they will usually offer a no negative equity guarantee as a promise that you will never have to pay back more than you borrowed.
Please call our 24-Hour Helpline: 0330 058 1579
What are the Different Equity Release Products?
In the UK, the main equity release products are lifetime mortgages and home reversion schemes. The first involves taking out a mortgage that you have for the rest of your life, without the requirement to pay it back on a monthly basis.
As for a home reversion, you sell a share of your home to a local lender and when the scheme eventually ends, they will sell your property and take the share of their money that is raised through the sale of the home.
Can You Release Equity If You are Claiming Benefits?
Yes, you are not disqualified from releasing equity if you are claiming benefits. There are many different plans you could have, meaning you could enjoy an increased income with both state benefits and an equity release loan (though the loan is not legally classed as an income).
Having said that, some plans do interfere with your benefits entitlement, and it is important to recognise this before you select a plan, as you want to make sure you can afford equity release.
How Can an Equity Loan Interfere With Your Benefits?
When you are claiming means-tested state benefits, you must be able to prove that your income is below a certain amount, and thus you are in need of a monthly top-up provided by the government.
If you take out equity and your funds increase significantly, it could result in you no longer qualifying for benefits.
If you currently receive Universal Credit, keep in mind that if you have between £6,001-£16,000 in your savings, your Universal Credit amount is likely to be reduced. If you have more than £16,000, it will be stopped completely.
This means taking out a significant amount of equity could prevent you from receiving Universal Credit. The more valuable your property, the higher this risk is as the higher your equity loan offer tends to be.
As for Council Tax Reduction, the same minimum amount applies, so if you have at least £16,000 in savings, including any money you have gained through equity release, your benefits will be stopped.
Please call our 24-Hour Helpline: 0330 058 1579
What Can I Do If My Preferred Equity Release Plan Interferes With My Benefits?
Firstly, it is possible that your benefits will be stopped and you will still be better off financially, as your equity loan may be very high.
This means you shouldn’t dismiss equity release entirely if you claim benefits. However, you should inform an adviser of your situation as they will be able to help you determine the best decision you can make for your future.
However, in some cases, you need your benefits more than you need your equity loan, particularly if you would only receive a small equity release loan.
Again, an adviser will tell you if this is the case, and if it is, they can recommend alternatives to equity release that still provide you with a supplementary income.
If you would be happy with a plan that allows you to continue to claim benefits but at a reduced rate, we would recommend keeping costs low by opting for an interest only scheme or a voluntary repayment plan.
That way, you would never be expected to repay any of the loan, so even if your benefits money is low, you would still be financially secure.
Please call our 24-Hour Helpline: 0330 058 1579
How Can I Boost My Income in Retirement Without Claiming Benefits?
One way to boost your retirement income without claiming benefits is to use equity release to purchase a rental property via a buy to let scheme.
As opposed to a one-off sum of money, this would allow you to receive an income consistently, so it is a great option for pensioners looking for a monthly increase to their finances.
Another option is to return to work part-time, which is what many pensioners find themselves doing.
However, we would tend to advise against this as most people are burnt out by work and do not have the energy to continue to dedicate time to something they may not enjoy. If you do love your job, this could be a great option.
Finally, there is always the option to take out a traditional loan and avoid interest accruing and inheritance being significantly affected.
Yet, if you do take this route, you would have to be able to repay the loan when the lender requested, and the interest rates may be higher than the average interest rate for equity release.
Please call our 24-Hour Helpline: 0330 058 1579
How Can I Check Whether My Equity Release Loan Would Impact My Benefits?
The best way to check whether your equity release loan would impact your benefits is to speak to one of our expert advisers on our freeline that is open from 8am-8pm every day of the week. The number is 0330 058 1579.
The adviser will ask questions about your financial situation and your preferred plan to offer niche advice on this topic.
As helpful as we hope this article will be, there is nothing more useful than getting advice on your specific situation, so we recommend getting in touch as soon as possible.
It is also a good idea to contact Citizens Advice as they will have dealt with this issue plenty of times, and they may be able to speak on an aspect of the situation that an equity release adviser is less experienced in (2).
Please call our 24-Hour Helpline: 0330 058 1579
How Else Does My Equity Release Loan Impact My Finances?
The impact that equity release has on your finances is mostly seen after your death, as you do not have to repay the loan while you are alive. This means your family are the ones who feel the impact of it the most.
Generally, the inheritance you will be able to leave is reduced. You may have implemented inheritance protection, which ensures your family inherit some money, but as you have dipped into the funds that were locked in your property, they will receive less than normal.
As for your present situation, equity release will only improve your finances as you are able to benefit from tax-free cash that does not have to be repaid, so it does not feel like you are in debt. This allows you to improve your quality of life in retirement significantly.
Frequently Asked Questions About the Financial Side of Equity Release
1. How Much Does Equity Release Cost?
Equity release is not associated with a fixed cost as you have the freedom to select different equity release plans, different lenders, solicitors, and advisers. This means you ultimately decide how much equity release costs.
There are certain things you can do to make it cost-effective, such as choosing affordable lenders and widely available plans. You could also use your equity loan to pay for some of the fees if you cannot currently afford it.
In terms of how much it could cost you in the long run, it will reduce the funds you can leave to your family, so this is something to consider if you are keen on leaving money to your loved ones when you die.
Please call our 24-Hour Helpline: 0330 058 1579
2. Can I Make Repayments on My Loan?
It is generally discouraged to make repayments as equity release is supposed to be a lifelong commitment. Most homeowners do not repay their loan at all.
However, some do choose to repay either the interest or the actual loan amount, and this reduces the amount they owe at the end of the scheme.
Make sure you check your lender’s policy before signing up for an equity release plan with them, as they may charge an early repayment fee for equity release, and it is better to avoid this if you can as it can be a hefty charge.
3. Do I Have to Be a High Earner to Qualify For Equity Release?
No, not by any means. Most equity release providers will not take into account the customer’s income, so you do not have to be a high earner. You could be cash poor with a valuable property that is eligible for equity release, and this would qualify you for an equity release loan.
Certain lenders will perform eligibility checks that include income checks and credit checks, which means you may end up being ineligible for some plans as a result of a bad credit rating or a low income. However, this is quite rare with equity release as it was designed with cash-poor people in mind.
4. Can I Use Equity Release to Top Up My Pension?
Yes, you can use equity release as a way to top up the money you are already receiving through your pension.
One of the best ways to do this is to take out an income plan, which involves receiving monthly payments that supplement what you already earn.
Even if you don’t select an income-only plan, your equity loan is likely to top up your income anyway, unless you spend it on a specific expense such as a second home (that you don’t rent out) or home improvements.
For this reason, if you are in need of extra money to pay the bills each month, we would advise choosing a plan that offers monthly payments, or a cash reserve that you can withdraw money from, which you can do with a drawdown plan.
Please call our 24-Hour Helpline: 0330 058 1579
5. Is There Interest Applied to Equity Release Loans?
Yes, interest will be applied to your equity release loan, so make sure you are aware of the interest rate of your chosen arrangement before you commit to it.
It is possible to repay the interest each month through an interest-only scheme, though most equity release consumers leave it to accrue.
There is also compound interest charged on your loan at the end, so if you have not made repayments, this amount will be much higher.
However, the cost of your home should cover this, so don’t worry about it as long as you have a no negative equity guarantee in place.
6. Are Equity Release Loans Taxed?
No – neither home reversion schemes nor lifetime mortgages involve money that is taxed (3).
With any equity release product you use, you will benefit from tax-free cash, whether that’s presented to you in regular instalments over time or as an equity release lump sum.
Equity release funds are also not liable for inheritance tax, so your family will not have to pay the usual 40% inheritance tax unless your estate is worth more than £325,000, which is very unlikely if you have taken out equity.
Contact Equity Release Warehouse
You can take our word for it, or you can bring the difficult questions to us and unpack equity release in a nuanced way. It’s your choice, but we recommend getting in touch with us so that you can understand the reality of equity release before pursuing it.
It is also advisable to make the most of our free consultation as our advice will be tailored to you, and you will not get this everywhere.
We have guided countless customers through the process of releasing equity, and we are experienced in pairing them with the best plan for them, so we are ready to do the same for you.
All you need to do is call us on 0330 058 1579 or request a callback. The sooner you take the extra leap, the sooner you could get your hands on tax-free cash that was once tied up in your property. Why delay the process?
For a sneak peek of how much money you could release from your property, even if you are currently claiming benefits, use our free equity release calculator or request a personal quote from us.
References
[1] The Budget Planner: How to manage your money
[2] Benefits https://www.citizensadvice.org.uk/benefits/
[3] Do you pay tax on equity release? https://www.telegraph.co.uk/financial-services/retirement-solutions/equity-release-service/do-you-pay-tax-on-equity-release/
