Unlocking the Value in Your Home
The term ‘capital rich, income poor’ describes the position of many people in their later years. There is value locked up in the home but there is little income and little in the way of savings.For many people their most valuable asset is their home. With state pension age increasing, the reduction in the state financial safety net and the lack of pension provision being made by the majority of the UK population, equity release is likely to become increasingly important.Releasing the value tied up in the house can provide a means of funding spending that might otherwise be unaffordable. It can provide (eg):
extra retirement income
capital to fund a ‘once in a lifetime’ holiday, home improvements, a new car
funds for grandchildren’s education
funds for gifting to family (and reducing inheritance tax liability)
Moving to a smaller property is one option to consider. However many people do not wish to leave the family home and its fond memories. The expense of moving to a smaller home and buying new furnishings can quickly eat into the cash that is released and make moving not worthwhile.
The other option to consider is equity release. This has the advantage of avoiding the emotional upset and costs of moving, whilst releasing cash either by way of a lump sum or regular tax-free income.
Lifetime mortgages and home-reversion schemes
There are two types of equity release scheme –home-reversion schemes and lifetime mortgages. Most of us have heard horror stories about equity release, and this is why it is important to seek advice from an independent qualified adviser. The correct product, provided by a reputable company and carefully chosen can make a real difference to a person’s income in retirement or help them to enjoy that long dreamed of holiday or special purchase.
Equity release schemes are restricted to borrowers over a certain age, usually 60 or sometimes 65. The two main types of Equity release scheme are:
Home reversion schemes: With this type of scheme, the homeowner sells a percentage of their property to the scheme provider. The homeowner becomes a tenant but has the right to remain in the property until they either die or move into a care-home. The deceased’s estate (very often children) is entitled to the proceeds of the percentage of the home that was not sold to the scheme provider.
Lifetime mortgage: This is similar to a “normal mortgage”. The main difference is that the term of the mortgage is until death or until a move into a care-home. The minimum age that this type of mortgage can be taken at is usually 60 and there is no upper age limit. Interest payments may be made by the borrower, similar to an interest only mortgage or the interest can be added to the mortgage so that there are no on-going payments. Very often the interest rate can be fixed for life so it is possible to calculate the size of the mortgage in say, 2, 3 5 or even 20 years’ time. When the borrower dies, the house is usually sold, the mortgage repaid and the balance of the sale proceeds distributed to the deceased’s estate.
Lenders which are members of the Equity Release Council provide a ‘no negative equity’ guarantee. This means that the borrower can never leave a debt arising from a Lifetime Mortgage after they die. Therefore if house prices fall or the borrower lives much longer than they anticipated and at death the mortgage is greater than the value of the borrower’s home, the “unsecured” debt will be written off.
It is particularly important to approach an independent financial adviser who holds the Certificate in Equity Release. You will then be assured that the adviser is suitably qualified and is working on your behalf to find the lender that offers the right equity release product for your needs.
Tax and benefits
Releasing equity from your home may also have tax advantages. The capital lump sum you receive is viewed as a return of capital and so is free of taxes.
If the value of your estate is above the Inheritance Tax threshold (£325,000 for a single person or £650,000 for a couple who are married or in a civil partnership – tax year 2012-2013) you will save tax by spending (or giving away) this capital: a discount of 40% on everything you spend! You may be able to eliminate altogether the liability to IHT.
Graham Westhall is a Chartered Financial Planner with SWLaw Investment and Financial Planning Ltd and also holds the certificate in Equity Release.