Equity Release – is it right for you?
As a nation, we love property, I try to expand my clients views, but often decisions made decades before meeting me means that the largest asset some of my clients own is their home and often they are pension and cash poor, so how do you release the value of your home?
Always, always, always my preferred route is that around retirement time, before you get too old and grumpy to socialise and meet your new neighbours, it’s to downsize your home. This is by far the simplest and often the least expensive option.
Your main home, known as your Principle Private Residence in the tax world, can be sold without any capital gains tax and you can realise to cash some of the property value when you sell and buy a less expensive property for your retirement years.
This is actually a good retirement savings strategy!
However, often the upheaval of moving, we gather lots of ‘rubbish’ over the years, is too much or we don’t want to leave our fond family memories behind, or for some it’s the fear of the unknown; moving can be a scary/stressful process if you’ve never done it. That’s when I’ll consider with clients lifetime mortgages aka equity release, or for my American and Australian family ‘reverse’ mortgages.
I asked a good friend and colleague Marc Harris to help me with this piece, Marc is a lifetime mortgage specialist. If you’d like to speak with him, I highly recommend and trust him, he’s a really nice chap and has some glowing testimonials from those of you who have already used him, please just drop me an email at firstname.lastname@example.org and I’ll connect you both.
So, let me explain Lifetime Mortgages to you.
What is a Lifetime Mortgage?
A lifetime mortgage is a long-term loan secured against your property. You will retain the ownership of your property and you will only be required to make interest only payments if you wish. Alternatively, you can also choose to make no payments at all and simply allow the interest to roll up, which is the more common approach.
When you die or move into long-term care, your home is sold, and the money is used to repay the loan (and accrued interest). If you are a couple owning the property, this would be the second to die or go into long-term care.
Anything leftover is paid in accordance to your will (make sure you have one please!), which often would be to your beneficiaries. However, in the unlikely event that the value of your house has decreased significantly it would be possible that the value of your home no longer covers the value of the equity release loan. The Equity Release Council has a ‘no negative equity guarantee’, which all Equity Release Council members offer on their equity release products. This means that in this situation the remainder of the loan would be written off by the lender and not charged to your estate, ensuring that whatever the future holds, your beneficiaries would never have to meet the cost of your loan.
Most lifetime mortgages are portable from property to property, subject to property eligibility criteria, which means if you move home you could do so and just take the equity release loan with you.
If you come into a windfall, repay the loan. Lifetime mortgages can often be repaid early but may be subject to an early repayment charge, so you’re not committed to keeping it outstanding, but in reality, it’s unlikely you’re going to repay the mortgage unless your numbers come up!
Additional borrowing may be available in the future subject to lending conditions at that time. So for example if you took a little out to start with, you could go back for more assuming you remain within the lending criteria.
Are Lifetime Mortgages right for me?
I don’t know the answer to that, I don’t know you that well, however I recommend you get advice, don’t do it alone please. There are some things in life you can do without advice but with equity release you need to speak to a trusted equity release specialist.
Either know equity release inside out or know a specialist!
I also recommend you discuss it with your family members before you make that all important a final decision.
The retirement mortgage
The retirement mortgage is a new type of interest only lifetime mortgage, that means you can pay off your current lender and take your new mortgage into your retirement.
The market is constantly changing and that’s why as a Chartered Wealth Manager with 25 years’ experience, I wouldn’t do it myself, so neither should you.
Why do people arrange equity release?
As I mentioned earlier, if you don’t want to, or can’t downsize, equity release provides some much-needed cash to;
- Supplement your pension income
- Complete some home improvements
- Adapt your home for old age
- Take the holiday of a lifetime
- Buy a second property/holiday home
- Help your children with their income shortfall
- Help your children or grandchildren onto the property ladder
- Repay outstanding mortgage or other debts
An often overlooked inheritance tax planning benefit of equity release
A valuable main home can be our working life goal but can often cause problems with inheritance tax planning.
We now have in addition to the £325,000 nil rate band, a residential nil rate band which provides an additional £150,000 (rising to £175,000) if your home is left to your children/grandchildren (I appreciate it is direct decedent’s, but I want to stay on track here).
So if your estate as a married couple will exceed £1m (£325k plus £175k each), or £500,000 for a single person, and inheritance tax planning is an important consideration for you, equity release enables you to move some of the value of your home out of your estate as a gift now as a Potentially Exempt Transfer or Chargeable Lifetime Transfer, so as long as you live 7-years, the value of your home or to be precise the value of the gift, is removed from your estate when calculating the inheritance tax liability.
I would like to sum up by saying, if you need additional income in later life, consider moving home, this really should be your first consideration. If, after discussing with your family you feel a lifetime mortgage is the option you’d like to explore, get advice and remember Marc is here to help you, wherever in the country you are, just email me on email@example.com and I’ll put you in touch.