In this second article by equity release expert Anthony Seward from John Lamb Hill Oldridge (JLHO), we explore the option of equity release as a solution for paying for care either in a care home or at home.
We are all living longer, which is the good news, many of us are also living with more complex health needs. Planning ahead for the possibility of needing care, or being able to afford care costs after an emergency, should be on everyone’s to-do list.
Paying for your own care at home or in a care home however, is a frightening prospect, not least because the total you may have to pay is currently so unpredictable. The deciding factor is the health and wellbeing of the person needing the care, and of course the greater the care needs, the greater the cost.
Currently for anyone with over £23,500 in assets – not including the home – will be paying for all of their own care, which in the most extreme, but not wholly unlikely scenario, might mean specialist dementia care for a husband or wife either at home or in a nursing home for, say 2 years. In 2022 the costs of this would be in the region of £1,600 per week, or over £76,000 a year; £153,000 over 2 years.
John Lamb Hill Oldridge, Equity Release experts
- In the first six months of 2022 over £3.6 billion was released by home owners from the value of their homes;
- Over 20% of equity release plans taken out with the primary purpose of covering day to day living costs (Canada Life 2022).
- The average sum released was £125,000, and for the first time in a decade the majority of new plans have been lump sum payments as opposed to drawdown schemes.
Planning ahead for care costs
If your parents own their own home Equity Release provides either a tax-free cash lump sum or the opportunity to draw down smaller amounts of money against the value of the property. Interest is charged on the money released.
Historically when the house was finally sold, the equity released would be repaid from the sale proceeds, but there are more flexible options available today.
Equity release to fund care costs
There are two types of equity release schemes – or lifetime mortgages as they are known today. The first, and more traditional scheme is a one-off cash lump sum also traditionally repaid when the house is finally sold with the interest “rolled up” over the lifetime of the loan. The second option enables borrowers to avoid the costs of a lump sum by releasing money from their property, but keeping some aside to be drawn down when needed – the benefit being interest is only paid on the money that is fully withdrawn.
For example, someone may release £40,000 but only take £10,000 for now, leaving £30,000 for future use. Until the rest is drawn down, interest is only paid on the £10,000 that has been fully taken.
There are two main options for repayment on both schemes: the first as outlined above is the more traditional option whereby the interest rate is fixed for life, and the interest on the mortgage is rolled up for the lifetime of the plan, and repaid to the lender when the house is finally sold. There are also easily understandable fixed early repayment charge schemes, which also make it simpler to work out the long-term costs.
The future of funding care
From October 2023 new legislation, part of the Governments plans to reform health and social care, caps care costs (care home or care at home) at £86,000 for every individual, regardless of individual means, at which point the Local Authority steps in to fund the care. The same legislation also raises the amount an individual has in assets to £100,000 before local authority funding kicks in. This will ensure that no-one will need to run down their finances to the current alarming level of £23,500.
On the face of it this seems like good news, giving people certainty over how much they may have to pay in care fees, and how much they can keep themselves. Sadly however the devil is in the detail. Unfortunately for some, their care costs will continue to be significantly in excess of the new care cap.
Case study - Lifetime Mortgage for Care Costs
A very common reason to use equity release is to help with regular care costs. This client of John Lamb Hill Oldridge, a man in his 80s, had a £750,000 property with a £150,000 mortgage secured against it. He needed a way to pay for his increasing care costs while staying in his own home.
John Lamb Hill Oldridge secured a lifetime mortgage for him, enabling him to pay back some of the funds loaned to him from his family members. It also included a drawdown feature – meaning he could withdraw enough money every year to cover his care and living costs, without impacting funding received through his local council.
Considerations about equity release to fund care costs
Taking independent financial advice is strongly advised if equity release is something you are considering to help pay for care fees – either in the home or in a care home. Because of the uncertainty over the amount of fees that might need to be paid, then specific options such as drawing down only the amount you immediately need could be the best option for you. But ensuring you have access to more funding as and when necessary may well be important too.
A key aspect of any equity release scheme is the amount of interest to be paid, how and when. With interest rates ranging from 2% – 6.5% it is worth shopping around; establishing if you can repay interest in installments versus “rolling up” the interest until the property is sold could make a significant difference as to the type of scheme you take up.
Peace of mind with equity release
There are many options regarding equity release with over 300 different products on the market. Working with a specialist such as JLHO will ensure that you are able to decide on the best option for you and your family; to give you peace of mind to fund all care costs well after the new legislation has come in.
Explore your equity release options
Find out about how John Lamb Hill Oldridge can help you release funds from your property to help with care costs, increase cash-flow, help with gifting and much more.