Don’t get me wrong, equity release should be the option of last resort. The alternatives are downsizing which has it’s own risks (mostly emotional) or living on less once your other funds run out.
We’d prefer that you didn’t run out of money but far too many people have investment strategies in retirement that make it inevitable.
Very briefly, you’re most likely staring down the barrel of a 30+ year retirement. It seems reasonable that you should want to maintain your lifestyle and therefore your money must grow by at least inflation, plus whatever you are drawing from it.
That’s never, ever going to be a possibility if a sizeable chunk of it is in cash (guaranteed to lose against inflation) or bonds (where the income doesn’t grow year to year).
And so, finding downsizing as unpalatable as starving you’re likely to turn to equity release plans.
They are also known as lifetime mortgages, and allow those over the age of 55 to borrow against their home. Thanks to decades of rising house prices, this can mean there is plenty available to borrow.
The number of people opting for these plans saw a 40 per cent increase year-on-year in 2017, with a record breaking £3bn being borrowed. It seems using your house to fund your lifestyle is becoming increasingly popular.
The positives are clear; there are no monthly repayments, with interest rolling up on a compound basis. The loan is repaid when the borrower dies or sells the house, and the total debt cannot exceed the value of the home.
The comparatively high interest rates, however, mean that a lifetime mortgage comes with a risk to any nest egg you may have planned for your children to inherit; it could be consumed by repayments.
Fortunately, if you do feel that equity release is right for you, with some careful planning you can alleviate the risk and be safe in the knowledge that you have something left to pass on.
1. Renovate to boost your home’s value
Around 60 per cent of people using lifetime mortgages put the money towards home renovations, to increase the value of the estate. Legal and General even offer a trial ‘property refurbishment’ equity release plan, that has just been extended from the capital to several towns and cities around the UK.
This plan determines the amount you can borrow by the projected value of the home once the renovations are complete, and is particularly useful for those living in homes in need of repair who are considered ‘equity rich’.
2. Picking a protective plan
Plans are available which shield a portion of your home’s value from your equity release lender. This means you can guarantee that if that portion remains untouched, it can be passed on to your descendants.
Plans with ‘inheritance protection’ are widely available; where a typical plan would allow a maximum of a 35 per cent equity release, these would allow you to release half of that amount.
3. Release ‘gifts’ to mitigate IHT
Any financial gift that is given to your descendants will be exempt from tax if you live for seven years. If you’re in good health, you can use equity release to reduce your ‘death tax’ or even bring you below the taxable threshold if you are near the IHT margin.
For example, you could support a relative who needs help with their housing deposit, or clear their mortgage now to avoid inheritance tax later. Of course, this comes with its risks as dying within the seven year time limit will bring about an unexpected tax bill for the recipient and in those seven years the interest accrued could wipe out the IHT saving.
Equity release is not right for everyone – if you have any questions around this topic, please feel free to get in touch directly.