Reasons for using equity release
Releasing equity from your home using a lifetime mortgage is tax free and gives you a lump sum cash upfront
or regular income which you can use for any reason on yourself or your family and friends.
Generating more income or capital can become important for people in retirement to maintain their standard of living although this may be limited to the available pension and investment income and savings.
For people in retirement, pension and investment wealth may be committed to providing income. There is little room for using this for any other reason as it would immediately reduce your lifetime income essential for meeting your daily expenses and you may look for other ways of raising extra money
In contrast property values net of mortgages exceeds £5 trillion representing 35% of all wealth and has been ignored, yet has the potential improve the quality of life or provide cash for other reasons. According to the Office for National Statistics, for those aged 65 and over the average property wealth is £272,900.
Homeowners have benefited from rising house prices
and about 16% of people aged over 65 have total wealth of £300,000 to £500,000, another 25% have wealth of £500,000 to £1 million and a further 22% are worth £1 million or more.
According to the Equity Release Council the total value released each year is £3.8 billion by 45,000 homeowners with an average age of 70, taking out new equity release plans or drawdown cash over time
. The average amount released as a lump sum is £104,000 and drawdown is £81,000 with a further £33,000 in reserve to use in the future.
Releasing cash from your home
There are many reasons for accessing cash using equity release and a survey by providers Just Retirement shows a number of purposes for the money either as lump sums or income over time.
|Percentage of people
|Main reason to release equity
||Home and garden improvements
||Holiday of a lifetime
||Pay off debts or personal loans
||Help family members
||Pay off interest only mortgages
||Meet everyday expenses
From the above table people in the survey used the cash from equity release for several reasons, not just one reason and the most common shows 63% of homeowners used the money for home and garden improvements. This investment may also increase the value of the property such as a loft conversion or extension by adding more space at a time when buyers would benefit from having an office at home.
Holidays of a lifetime are popular with 31% of people as well as repaying personal debts and loans by 30% of homeowners. From those surveyed 23% use equity release to help family members.
A growing number of homeowners have an interest only mortgage
maturing as lenders require the loan to be repaid and in the survey 22% said this was the purpose of equity release. A smaller percentage of 16% said they were using the cash to meet everyday expenses and cost of living.
Cash for a specific reason
There are many product features of lifetime mortgages
that can make it easier for you to access cash from your home for have a specific reason and some of these are listed below.
|Specific reasons for releasing cash
|Deposit on a property for children or grandchildren
|If you are renting, to purchase a new home
|To reduce equity for Inheritance Tax (IHT) planning
|Pay university fees for grandchildren
|Help their children start or expand a business
|To pay for long term care
A common reason to release equity would be to gift the deposit to children and grandchildren to help them on the property ladder. This can be a very effective way of creating family wealth as the purpose of the loan is to leverage the purchase of a property.
To reduce the cost of equity release
, a family member could agree to pay the equivalent of the interest amount on the loan which means there is no cost to the parent or grandparent for gifting the deposit. In addition, the interest is likely to be very low under 3% and similar to the interest rate on a residential mortgage for a first time buyer.
You can buy a new house with equity release
, either to downsize your home and release cash or buy a more expensive property and this is discussed below and can be an effective way to improve the quality of life such as moving to a coastal town if you can benefit from warmer weather.
If you have an inheritance tax (IHT) liability on second death and concerned about leaving equity for beneficiaries
, you can use equity release to reduce the value of your estate. With a substantial estate in excess of £1 million you can use a lifetime mortgage to release cash and gift to children, a type of living inheritance.
As an example, gifting £100,000 to a child for a deposit on a property would be free from IHT after seven years effectively saving £40,000 in future tax on the estate. The interest rolling-up also reduces IHT tax on the estate and therefore the actual cost of interest is effectively reduced by 40%.
Other purposes for equity release would be to pay university fees for grandchildren or to help your children start or expand a business. In both cases your family members can agree to pay the interest to you so there is no roll-up. On completing the lifetime mortgage
you may have other options available to you such as a reserve facility or further advance if house prices rise in the future.
Equity release can be useful for providing care at home and this can include releasing cash to make improvements to your home such as adding a ramp for access, a chair life to get upstairs, a wet room and many other options to make your life easier.
It is important to check the benefits you receive or could receive from the local authority first as releasing equity could prevent you from qualifying from these benefits.
Repay your current interest only mortgage
Many homeowners in the UK have interest only mortgages with no repayment vehicle. For residential mortgages lenders have a maximum age such as 70 or 75 years by which time borrowers must repay the loan or sell the property.
The Citizens Advice have warned that there are 934,000 homeowners at risk of having their homes repossessed because they cannot repay the mortgage when required by the lender.
There are a number of options to consider such as switching to another lender with a higher maximum age, a retirement interest only mortgage
(RIO) or equity release.
A residential or RIO mortgage are based on affordability which means you must provide you can afford to pay the interest amount to a ‘stress test limit’ should interest rates rise in the future. They are also reviewable after your preferential fixed rate expires.
If you would like more flexibility about the amount of interest you pay or prefer not to pay interest, an equity release mortgage could be the best option for you. There is no affordability test, it is not reviewable in the future and the provider fixed interest rate
continues for your lifetime.
If you can afford to pay a small amount each month, this would help to offset the roll-up interest and leave more equity for your family. If you have already been paying the interest on a residential mortgage, you may be able to continue to pay all the interest.
Our expert advisers can help you decide on the right amount of overpayment to reduce the cost of a lifetime mortgage at this link:
Free equity release quote to reduce costs by making an overpayment
If you decide to pay some of the interest you may receive a lower interest rate from the provider. Over the term of the lifetime mortgage this offsets the compounding effect of roll-up, reducing the cost of equity release
and providing more for your beneficiaries.
Relocating and buying a new property
If you are planning a change such as downsizing to release cash
or must do so to repay the loan to the lender or would like to buy a more expensive property you can use equity release.
Other types of mortgages may offer a large enough loan such as a retirement interest only mortgage, however, these are based on your retirement income and your affordability to pay the interest starting at 3.2% pa which is stress tested assuming interest rates rise in the future.
Assuming you buy a property acceptable to equity release
, older borrowers aged 70 years and over there are competitive interest rates from 2.5% pa where loan to values are under 35% of the property value.
These lower rates can reduce the impact of interest rolling up over time and if you can afford to make an overpayment each month this would also help.
See what the figures look like and how much you release for downsizing or buying a dream home using this link:
Free equity release calculator to downsize or buy your dream home
For an interest only mortgage your lender may require you to repay the loan at a certain age such as 75 and downsizing is the only option.
Once the loan is repaid the remaining equity may not allow you to buy a desirable property especially if you use some of the cash for other purposes. In this situation, equity release can allow you to buy a better property and additional cash for other needs.
If you own your property outright and would like to relocate to a new area such as the coast, you can use equity release to buy the home of your dreams
. If you are retired this is usually impossible due to your age, limited income, have limited savings and demand has seen property prices in popular coastal towns increase in the last decade.
As equity release is based on the property you intend to buy, this means you can leverage the higher house price giving you the opportunity to buy the home you want and live there for your lifetime.
This means if you are aged 75 living in a home worth £375,000 you could buy a property worth £700,000 with a provider loan to value
of 47.3%. The mortgage interest rate would be 3.96% pa and clearly there is scope to reduce the purchase price to buy either a larger property or one by the coast and at a lower interest rate.
Replacing an existing equity release plan
The cost of equity release using a lifetime mortgage has reduced considerably in recent years with fixed interest rates from 2.5% pa. For those that started a plan earlier than 2016 may find the interest rate they are paying is 6.0% pa or higher and it could consider repaying the mortgage early
with a new plan.
This means you would compare using a new mortgage used to repay the old plan adding the cost of any early redemption charges (ERC) which depends on the type of plan structure
. This may take a certain number of years to breakeven, however, the difference in interest rates could mean it greatly increase the potential equity available to beneficiaries in the future.
The equity release advisers at LCM are experts in making these calculations and can give you the important information you would need to make a decision on whether re-broking the plan is in your interest. You can also talk to your family
about these changes that could improve the equity available for your beneficiaries in the future.