How much is your house worth? For many of us who bought our homes when we had a family living at home, the answer is probably a LOT more than we paid for it! It’s probably one of the most valuable assets we have, but unless we want to downsize or move, we can’t easily free up the cash value of our home.
So, when the time comes when we do need liquid cash, whether to fund a new project, a dream holiday (whenever that may be possible), or to fund our long-term care, we may look at liberating some cash value through equity release.
There are two types of equity release, namely:
- A lifetime mortgage secured against your home
- Home reversion, where you sell part or all of your home in return for a regular income or a lump sum
In this article, we’ll be looking at the lifetime mortgage option.
What is a lifetime mortgage?
A lifetime mortgage is effectively a loan secured on your home that works like a mortgage. You usually need to be aged 55 or over, under a certain maximum age, and own your property to apply. Unlike a regular mortgage, with equity release you don’t have to make monthly repayments, but interest is charged and added to the value of the loan (compound interest).
Over time, even at a rate of 5%, this compound interest can really mount up into a sizeable debt. The good news is to comply with the Equity Release Council standard, your lifetime mortgage interest rates must be fixed or have a “cap” (upper limit) which is fixed for the life of the loan. Most equity release companies also have a “no negative equity” guarantee, so the amount you owe will never exceed the value of your home.
Get the right advice from a qualified advisor
It is very important to always seek professional advice on equity release from a qualified adviser. As a company Panthera Estate cannot offer advise on equity release; only a qualified individual within a regulated firm can do that. Our founder Paul Hammond holds the specific qualification to allow him to advise on Equity Release and Home Reversion plans, plus Long Term Care provision, and is regulated under our sister company Panthera Wealth.
No professional advisor can offer any advice on Equity Release without this qualification. So you can be sure you are receiving high quality, up to date advice from a professional when you talk to Paul.
How equity release works
The equity release company will value your home, and offer you a certain amount against its total value. The value of the agreed amount will depend on your age, your health and other factors. The older you are, the more you can usually borrow. Once an amount is agreed, usually a maximum of 60% of the value of your property, you can access it all at once as a lump sum, or draw it down as and when you need it. (More on this later.)
You can also still move house. The loan will transfer to the new property (subject to values). If you do sell the house to go into care, the loan will be repaid plus any interest first, then the remainder will be paid to your estate.
How equity release can help those requiring long-term care
As retired seniors, many of us don’t suddenly require residential long-term care; we just gently move towards it over time. So, you may require a basic level of home care, which you can afford out of income. Over time, this may build into the need for full-time care. At this point, you will need to assess if you are eligible for care funded by your local authority. However, this government-funded care allowance probably won’t cover all the costs of your in-home care. So, you’ll need some extra cash to enable you to continue living in the comfort of your own home with extra help (aging in place).
Equity release enables you to fund some or all of your home care costs, and stay in your home. If you move into residential care, and you are single, your property will be sold and the equity release loan repaid. However, if your spouse still lives in the property, your home will only be sold if they too move into residential care, or when they die. So, you will NOT have your home ‘taken away from under you’ whilst both or either of you live there.
Repayments and smaller withdrawals
Some lifetime mortgages allow you to pay back the loan monthly, but the ability to do this might result in higher interest rates. Another way to reduce the costs of a lifetime mortgage is to only withdraw a certain amount at a time (known as Drawdown). This is because you will only be charged interest on the amount you have actually taken out, not the total value of the available mortgage. How little you can withdraw at one time will vary according to your provider.
There is another major advantage to only withdrawing smaller amounts as you need them. To qualify for local authority assistance with care costs in England, you cannot have more than £23,250 in personal savings and cash assets such as shares. Means testing will also take into consideration your income. (Other areas of the UK have different limits). So, if you draw down £25,000, for example, you’ll push yourself over the upper limit and any financial assistance you may be entitled to will stop.
Equity release and local authority payments
Reducing your savings to below the local authority upper limit will make you eligible for payments. It also means you only have a maximum of £23,250 available as a cash reserve if you suddenly need money for home repairs or unexpected bills. Also, if your income increases from shares you still own or other sources, maintaining your bank balance *below* the limit can involve a lot of careful money management!
You also still need to fund your own lives too out of that total of £23,250. The costs of running a home with one person requiring care can be considerable when you need the heating on more, require specialist transport such as wheelchair taxis, or have home adaptations made. As Paul himself says:
“Taking the council-funded route can paint you into a corner.”
Equity release and Inheritance Tax
Equity release is actually tax-efficient in certain circumstances, as your lifetime mortgage is a debt against your estate. When the house is sold, the mortgage debt is paid off first, which reduces the overall value of your estate. If that debt brings the total value of your estate below the IHT threshold (currently £325,000 for a single person), there is usually no IHT to pay. Since your estate is only charged IHT on the amount over the threshold, reducing the estate’s overall value also means your beneficiaries will pay less IHT. (IHT can be complicated for those with a portfolio of assets - call us to discuss your specific situation.)
Timeframes and costs for equity release
If you think you might need some form of equity release in the next six months, you need to act NOW. Like all major financial documents, setting up equity release and finding the right lifetime mortgage takes time, Allow at least three months to have your home valued, assess your savings, work out how much it costs to run your home, and find out the position on the IHT on some assets.
You’ll also need to factor in valuation fees, solicitors fees and arrangements fees. Most equity release firms offer a ‘cashback’ for these upfront costs, or can add them to the cost of the loan. If you want to look at the council-funded route, you will usually need to run your savings down to just above the limit before your local authority will even start the process of means testing.
Aging parents and equity release
If you are looking at equity release on behalf of elderly parents or other relatives, that’s fine. We can talk through their position whether or not you have Power of Attorney. However, if you decide to move forward, our specialist will need to ensure that your parent/s understand what the process involves, and may suggest that members of your family who are beneficiaries to the will agree to it too. You might like to consider drawing up a Memorandum of Understanding so make sure everyone agrees as to how equity release will affect their inheritance in terms of the family estate.
Considering equity release? Talk to Paul first
Paul will talk through your situation in an initial online meeting, and discuss the options open to you. It really helps if you have available for that meeting:
- An estimate or valuation of the current value of your home
- The value of all your saving and assets in your name (whether sole or jointly owned)
- The annual running costs of your home
- Your monthly income including pensions and investments
Call Paul to make your appointment to discover if equity release might be the right option for you. There’s no obligation, just professional information to help you make an informed choice with your family. If you do want to move forward with equity release, Paul will partner with our dedicated specialist team to help you make the arrangements and get the paperwork sorted.
Disclaimer: This article does not constitute financial advice. This is for information purpose only. It is important you seek advice from a professionally qualified advisor in Lifetime Mortgages.