Data from the Office for National Statistics shows there were more than 90,000 divorces in England and Wales in 2018, and almost all the couples involved will have faced financial hurdles such as how to divide their savings and assets like the family home.
Divorce rates have recently been edging up. More than 100,000 couples in the UK go their separate ways each year, and almost all face financial hurdles such as how to divide their savings and assets like the family home.
What are the consequences of divorce in later life?
The closer you are to retirement, the less time there is to recover financially. Older couples who have paid off the mortgage and are hoping for a comfortable retirement often find their finances thrown into turmoil after a divorce. Two homes with all the associated running costs are needed at a time when savings, investments and pension pots are being halved.
Once you have decided how your assets are to be divided between you, you must work out the percentage of your home’s value that this would equate to. For example, if your home was worth £250,000, and your assets being split 50/50, you might need £125,000 to buy your spouse out of the home.
How equity release can help divide assets
One of the most emotive decisions to make is who, if anyone, will keep the marital home. If neither partner wants to stay, or one can’t afford to buy the other out, the house can be sold and the proceeds split. But there is another option for those who don’t want to sell.
If you are over 55, you can use an equity release product to free up cash and buy out your partner. Equity release allows you to access the capital tied up in your home and the mortgage is repaid after your death or after you enter long-term care. There are two types of equity release product: lifetime mortgages and home reversion plans.
How does a lifetime mortgage work?
A lifetime mortgage is a charge secured against your home, in which the total amount borrowed (mortgage plus interest) is repaid when you die or go into long-term care. At that point the property is usually sold to repay the loan.
It may be a mortgage but you don’t have to make any repayments until the house is sold. The interest rolls up and is repaid at the end of the mortgage, which means the debt can grow quite quickly over time.
Some lifetime mortgages allow you to make regular interest payments to keep the total interest down, however.
You can usually borrow up to 60% of the value of the property and the interest charged must be fixed or have an upper limit. The amount that you can release is determined by your age and the value of your home, however. Lifetime mortgages from Equity Release Council-approved lenders come with a no-negative-equity guarantee, which means your estate will never be forced to pay back more than the value of the house even if the outstanding loan is greater.
Equity release mortgages allow you to continue living in the property until you die or move into long-term care. If you decide to sell the property and move, you can transfer the mortgage to the new property subject to your lender’s approval.
How does home reversion work?
Home-reversion plans allow you to sell part or all of your property in return for a lump sum. Depending on your age, you typically get between 20% and 60% of the market value of your house. However, this is probably considerably less than what you would get if you sold on the open market, and some providers require you to be over 65 to apply.
As with a lifetime mortgage, you can stay in your home until you die or move into long-term care, and you may be able to transfer the loan to another property if you decide to move. These products also come with a no-negative-equity guarantee.
Is equity release safe?
Equity release had a poor reputation in the past when thousands of borrowers found they owed more than their property was worth. The no-negative-equity guarantee now means that the amount you have to repay is capped at the sale price of your property. Even if the value of your home plummets, the remainder of your estate is protected and will pass to your beneficiaries as dictated in your will.
Important points to remember:
Equity release is usually more expensive than a normal mortgage and typically has a higher rate of interest.
Equity release may reduce the value of your estate and could affect your entitlement to means-tested benefits. Ask an adviser for a personalised illustration to help you choose the best plan for your unique situation.
With home reversion plans, you will be expected to carry out maintenance and the property will be inspected regularly
Always get advice to understand how equity release works and determine whether it is right for you.
- Try our free equity release calculator now and see how much tax-free cash you can release.
The above article was created for Telegraph Financial Solutions, a member of Telegraph Media Group. For more information about Telegraph Financial Solutions, click here
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