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Mark Gregory, Founder and CEO at Equity Release Supermarket
www.equityreleasesupermarket.com
Tel: 0800 678 5955
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Question
Equity release and divorce
My wife and I have recently divorced and we were considering selling the home and splitting the proceeds. However, my wife has stated a preference to remain in the home, which was our family home, and has raised the idea of using equity release to buy me out and then fund her living expenses.
Things are very amicable between us and I am happy with the idea in principle because it would mean our children and grandchildren will still get to visit the family home and we can gather for events such as Christmas. Indeed, my wife doesn’t have a pension so it would solve the problem of her lack of pension income.
My question is really whether something like this is possible? Would a lender consider offering equity release for this purpose or should we look at another solution?
Answer
It is becoming increasingly common for older homeowners to use the equity within their homes as a settlement for their divorce.
There are later life lending options, such as lifetime mortgages, RIO’s and retirement mortgages that could all fit the bill. Which one you choose will depend upon your ex-wife’s financial situation, both now and in the future.
If we focus on whether a lifetime mortgage can be a solution, it is dependent upon the divorce settlement and what’s agreed between all parties concerned.
For instance, if it’s a straight 50/50 split then you would need a 50% loan-to-value (LTV) from the lifetime mortgage just to repay a partner (assuming no other savings).
This is without providing extra funds for retirement living expenses and costs. To achieve 50% of the property value, the homeowner will need to be around age 75.
Therefore, as you can see, there are several factors that will determine whether using equity release is a viable way for your ex-wife to buy you out of the property – her age, the value of your home and the amount of money you are looking for.
This article I wrote some years ago explains more, but the older you are, the more you are able to borrow against the value of your home (the higher the LTV) and lenders use the age of the youngest homeowner to determine how much they are prepared to lend you.
I’ll assume that the younger of you is 65 and your home is valued at £300,000 to give you an idea of the maximum you could borrow.
There are a couple of lenders that are currently offering an LTV of 39% on their plans at this age, and so you could borrow a maximum of £117,000. They also both offer a cashback which could help with other expenses.
If you are slightly older, then onefamily offer a lifetime mortgage that has a 45% LTV that can be accessed from age 70. In this scenario, you could borrow a maximum of £135,000.
Obviously, the actual amount you can borrow depends on your age and the value of the property, but I hope this gives you an idea of what you could borrow to both settle your divorce and support your ex-wife’s retirement income.
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Question
Do I have to pay tax?
I have a very quick question regarding equity release? How much tax do I need to pay on the money released and how do you calculate the amount of tax due?
Answer
The good news is that there is no tax to pay on the money you receive through equity release. This is because you are releasing equity on your residential property.
So, there are no calculations for you to make! That said, what you do with your money may be subject to tax.
For example, if you don’t use your money immediately and instead put it into savings accounts, the interest could be taxable.
Another tax angle to consider is where funds from releasing equity are gifted – a potential inheritance tax liability could arise in the future.
Here the rules regarding tapering relief could apply, as any gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’. In such situations you should always speak to a tax specialist.
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Question
Will my pension income impact my interest rate?
I would like to release some equity from my property to make some improvements to my home, including an extension and patio area to the garden.
I have a pension income which amounts to about £1,000 a month and I also have some money put away in an ISA worth about £25,000.
Will these be taken into consideration when looking at equity release? I don’t want to use my savings for the building work because I want to keep it for an emergency – anyway, it wouldn’t cover the cost of the work. However, I wondered whether my ‘wealth’ would help me get a better rate.
Answer
One of the first things your expert adviser from Equity Release Supermarket will do is talk through your financial situation with you and your goals for the future.
If they believe that equity release isn’t right for you, they will tell you and discuss alternatives such as RIO’s or retirement mortgages.
From what you told me about your income and savings, then equity release could be a great solution to pay for the home improvements you are planning.
One of the many advantages of equity release is that neither your income nor expenditure is assessed when lenders are calculating what they will lend you.
So, no, your pension income and savings will not be considered if a lifetime mortgage is the route to go down. Lenders here will only look at your age, the value of your property and where it is in the UK.
Unfortunately, having some savings won’t help you to get a better rate as the interest rate you’ll pay is determined by the plan and the features you opt for.
However, with lifetime mortgages, the less you borrow against the value of your home, the lower the interest rates do become.
Therefore, upon discussion with your adviser, an example of borrowing the full amount to get an interest rate could be arranged. Then an example of using some of your savings to borrow less, could be obtained to show the lower interest rate and seeing the effects of this longer term.
This will give you an idea of whether using savings would be of interest to you and could formulate a discussion between yourself and your adviser.
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Question
How do I know what my options are?
I have seen several adverts for equity release on the TV and stumbled upon this website during the course of my research. I have heard equity release is not always the right choice for everyone and, indeed, I have my reservations about it – I am a little concerned about compound interest, for example.
How can I find out more and get an independent opinion on what is right for me? To offer you some basic background: I am a retired widow with a house worth £650,000 which is mortgage-free. I have minimal widow’s pension and the state pension but little other income.
Answer
I always recommend that you speak to an independent, impartial adviser who is an expert in equity release and a whole of market adviser. This ensures that you receive the best quality advice and have access to all the options available to you.
If you speak to a lender directly, they will only be able to advise you on their own plans and if you speak to some brokers (such as one that advertises heavily on TV), they will only advise you on plans from one provider – which is their own as they are part of the same company.
I would also caution using websites that claim to find you the best deals in the market as they are mostly lead generators who will sell your details onto the highest bidder.
As the founder of Equity Release Supermarket and an adviser for many years, I can assure you that we are a leading, whole of market, independent advisory service and we would be delighted to help you.
I’m also very proud of our award-winning website, which allows you to learn about equity release and compare actual plans that are available now – which you cannot do on any other equity release broker website.
I understand your reservations about equity release, but from what you’ve told me about your financial situation, it could be an ideal way to supplement your income in retirement and one of our advisers would be more than happy to talk to you, if you decide that you want to find out more about equity release.
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