Welcome to agespace money, the podcast that gives you insight, ideas and perspectives on elderly care and finance.
This podcast is presented to you by Annabel James, Founder of agespace, which is a one-stop online resource for anyone looking after, or caring for, an elderly parent; and Jason Butler, financial wellbeing expert and author of “Money Moments: Simple Steps to Financial Wellbeing”.
This podcasts focuses on the topic of equity release.
What is equity release?
Equity release is where you release equity on the value of your home, without selling it.
There are two groups of people who might be considering equity release:
- Those with not enough in their pension; and
- Those who still have a loan (mortgage) on their property.
Whether you’re trying to replace an existing debt that you can’t repay, or need to tap into the equity in your property to meet your needs, equity release is a bonafide way of planning, but should not be your first port of call.
The first question you should ask yourself is, “Why would I not sell my current house, and downsize to a smaller property?”. Buying another home for lesser value and releasing the equity is the cheapest, simplest and easiest option.
However, some people won’t want to do this, as they might like having space for friends and family to visit; they may already have a good support structure in their local area which they don’t want to lose; or they have an emotional connection with the family home.
If you don’t want to sell your home, and opt for equity release instead, you have two simple routes with different implications.
- Sell a proportion of your home to an equity release provider.
The amount you can release tends to be relatively small. The equity release provider will take a proportion of the increase in value, however, the amount they get in ownership is normally more than they give you of the market value.
- Disadvantages: The amount the equity release provider gets in ownership is more than they give you of the market value, which could be a big price to pay. For example, if your home is worth £100,000, and they give you £25,000, they might want 40-50% ownership.
- Advantages: You are guaranteed to live in your home for the rest of your life, and you do get some of the increase in value; and you can choose what you want to do with the money.
- If you already have a loan on your property, you could take out a lifetime mortgage secured on the property at a fixed rate of interest, but the interest rolls up.
For example, you might borrow a ⅓ of the value of your property, and the mortgage provider will guarantee you will never owe them, with rolled-up interest, more than the value of your home.
There are different types of lifetime mortgages. For example, some will allow you to pay the interest, so it doesn’t roll up. TIP: This could be a good option if you have pension or dividend income that you could put towards paying off the interest, whilst you don’t need care. That way, you can only let the interest roll up when you don’t have anymore income, or where this is being used to fund other needs.
Advantages of lifetime mortgages:
- You continue to have all the upside and value;
- The loan is deductible from your estate for inheritance tax;
- You are free to do as you wish the money;
- You can even move home, subject to your home being sufficient security, or to paying a fee.
This is a complex area, so it’s important to seek financial advice.
There are specialist financial advisers that can help you, and walk you through the options; They also usually won’t charge for an assessment.
Where can you get advice?
- Search the web for Equity Release advisers.
- There are four big companies in the market, and Key Retirement Strategies is the biggest.
In the 1980s, equity release companies had a bad reputation which may put some people off, but don’t worry – this is now a specially authorised area, so these companies need to meet certain criteria, and sign up to certain regulations, to provide this service.
When can you apply for a lifetime mortgage?
- The earliest you can apply is age 55, but you will get better terms if you apply when you are in your mid-late 60s and onwards.
- However, you should still think about this before, and a financial adviser can help you to forward plan, and to map-out and model lifelong cash flow, and the ‘What if’ scenarios.
Other things to think about:
- Think about what you might do with your home, before you need to.
- Consider the implications of either keeping your home, or releasing the funding. However, be clear on the implications for your potential estate beneficiaries.
- Ask yourself, “What is important to you?”
SUMMARY OF TOP TIPS:
- Before you consider releasing equity on your home, ask yourself why you would not sell your home and downsize. Buying another home for lesser value and releasing the equity is the cheapest, simplest and easiest option.
- However, if you want to release equity on your home, you could sell a proportion of your home to an equity release provider, who will take a proportion of the increase in value of your home. Whilst, this way, you are guaranteed to keep your home for the rest of your life, the amount they get in ownership is often more than they give you of the market value, so you will need to consider if this is the best option for you.
- If you already have a loan on your home, you may consider taking out a lifetime mortgage secured on your property at a fixed rate of interest, but where the interest rolls up.
- There are different types of lifetime mortgages, and some offer the option of paying off the interest so that it doesn’t roll up, if you can afford to – this is a genuine opportunity to consider, if you can.
- Seek financial advice. Equity Release advisers are specially authorised, and can walk you through the options – they normally won’t charge for an assessment.
- Think about the implications for keeping or releasing funding on your home, and be clear about the implications for your potential estate beneficiaries.
- The earliest you can apply for a lifetime mortgage is 55, but you will get better terms from your mid-to-late 60s, and onwards. However, start thinking about what you might want to do well before.