Property, equity and retirement can be a complex topic, so we asked Peter d’Aguilar to shed a little light on some of the options currently available
One of later life’s great challenges is how to ensure we have a comfortable retirement. The two most important factors within our control are ‘where to live’ and ‘what to live on.’ If you are lucky enough to have a generous private or company pension pot to keep you in the manner to which you are accustomed, this is not a major problem. If, however, you are concerned about how to pay the bills and afford a few essential luxuries once your regular monthly salary ceases, then there are decisions to be made.
One option is downsizing to a smaller house with lower overheads, thereby releasing capital and reducing outgoings. While this could solve any long-term financial concerns, it might also involve a drastic change in lifestyle and moving further away from close friends and family - plus the immediate expense of estate agents, solicitors and removal firms. If you are determined to remain in the family home, there are ways to utilise the money invested in your bricks and mortar. These products come under the umbrella title of Equity Release and give access to the capital tied up in your home, which is then reclaimed by the lender when you die. Equity release is an easy way to raise cash - though it is not necessarily the cheapest. However, any beneficiaries of your estate will find their inheritance reduced accordingly.
If you are aged 55 or over, you can take out an equity release product to free up some of the money locked into your main residence – whether as a one-off lump sum or in several smaller amounts (or, as a combination of both). It’s important, however, to remember that equity release can be more expensive in comparison to an ordinary mortgage. There are two main routes to releasing the capital in your property. The most widely used is a Lifetime Mortgage, which allows you to borrow some of your home’s value at a fixed or capped interest rate. The Lifetime Mortgage is a popular choice, as it allows the homeowner to take money out of their property in instalments up to an agreed amount – with interest charged on the sum taken, rather than the whole amount available. The borrower does not have to make any interest repayments during their lifetime but, if they do, it reduces the ultimate cost to their estate.
There are several factors to consider before committing to a Lifetime Mortgage. The earlier you start, the larger the ultimate cost – as unpaid interest is added to the loan. The maximum you can borrow is 60% of the value of your property. You can remain in the property for the rest of your life or move to another property – as long as the new house passes muster with your equity release provider. When your property is sold, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more – due to a ‘no negative equity’ guarantee. The loan amount, plus any accrued interest, is paid back to the lender when you die or move into long-term care.
For those aged 65 plus, another equity release option is a Home Reversion Plan. This involves an equity release provider paying you a tax-free lump sum for a portion of your home at below-market value. You can then live rent-free in the property until you die. When it's sold, the proceeds are split based on the percentage owned by you and the lender respectively - if the value of your property rises significantly, the lender stands to benefit. Home Reversion Plans allow the homeowner to ring-fence a percentage of their property. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
Another idea worth considering is a Retirement Interest-only Mortgage. While this is similar to a standard interest-only mortgage, it has two key differences - the loan is usually only paid off when you die, move into long term care or sell the house and you only have to prove you can afford the monthly interest repayments. While there’s no minimum age requirement, retirement interest-only mortgages are generally aimed at older borrowers who might not qualify for a typical interest-only mortgage. Unlike a Lifetime Mortgage, you only pay off the interest each month; so monthly repayments are lower and it’s likely there will be more left to pass on as an inheritance or to pay for long-term care.
There are two parts to paying off a retirement interest-only mortgage - the interest and the outstanding capital. During the term of the mortgage, you will make monthly repayments to cover the cost of the interest on your loan. The outstanding capital still owed will be paid off when the house is sold, you die, or when you move into long-term care.
In conclusion, there are a few considerations to keep in mind. Equity release is generally more expensive than an ordinary mortgage. It’s best not to borrow the full amount you need in one go, as this will end up more expensive. You should check whether you can transfer the scheme if you move home, what happens if you die soon after taking out the scheme, whether it will affect your state or local authority benefits and if there are penalties for early repayment.
Always seek advice from an independent financial adviser first and take the time to check they a member of the Equity Release Council, on the Financial Conduct Authority register and signed up to the Financial Ombudsman Service. Find out what their fees are, what type of equity release products they can offer and any other costs you may have to pay.