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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
Releasing equity to pay for another property
I want to release equity from my current property to help my daughter with her house purchase. She and her husband need more space for their growing family, but they don’t have quite enough to get the property they need. I have offered them some money, and will be named on the mortgage deeds in a formal way. However, to do this I will need to release equity from my home (I don’t want to sell).
I would like to establish whether, firstly, this will be possible and secondly, whether there are any tax – or other financial implications – to consider. For example would I be liable for the stamp duty surcharge?
I own my property outright. It is worth £450,500 and I would like to release £100,000 if possible.
Answer
Gifting to family using equity release is becoming increasingly popular as we are seeing first-hand at Equity Release Supermarket – ‘a living inheritance’ as some call it.
To be able to give a complete answer I would need to know whether your daughter is purchasing the house with her own mortgage aswell? The reason being, if she has a mortgage with her husband, you may not be able to be a co-owner as you wished. I am not a legal expert, but I have consulted a legal expert who deals in such matters.
They advised that you could put a restriction to show you have either a private mortgage (which would need the consent of the mortgage company), or you could enter a restriction to show you have some other interest in the property, as evidenced separately by way of a Declaration of Trust.
Alternatively, assuming your daughter and her husband have no mortgage, and you are effectively buying a share of the property, then your share would be subject to the second property stamp duty rate of 3% on the amount you put in.
If you are gifting the money, rather than offering a loan, you will need to be aware of potential Inheritance Tax and the 7 year gifting rule. If you are going to be a co-owner, then you will also need to be aware that on any subsequent sale your share will be subject to Capital Gains Tax, if your share has had increased in value.
With that established, the good news is that you can use equity release to access some of the money in the value of your home to help your daughter.
The eligibility criteria for equity release is that you need to be aged over 55, a homeowner and your property is in the UK. You have told me that you own your own home outright and so I’m assuming that you also meet the other two requirements.
As you are looking to release about 22% of your property’s value, and assuming your property meets the lenders underwriting criteria and valuation, this shouldn’t be a problem as this is well within the providers’ loan-to-value amounts.
The second piece of good news is that when releasing equity from your main residence, there is no tax to pay on the money raised.
As always in such matters, without the full information, it is difficult to fully assess your personal situation. I would therefore suggest that you speak to your mortgage broker and/or your solicitor who will be able to answer this for you.
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Question
Debt problems and equity release
I have rather unfortunately, due to unforeseen circumstances, managed to run up some debt over the past few years and I fear my only option is to sell my house.
A friend mentioned equity release might be an option. Would the debt problems work against me in this case? I inherited my home years ago so there is no mortgage, but I do have rather large sums of credit card debt and loans – to the tune of nearly £45,000. I am 59 and work full-time.
Answer
I’m sorry to hear that you’ve got into debt over the last few years, but the good news is that there are potential solutions for you that would mean you may not have to sell your house to repay these debts.
The first place to start is to talk to your creditors and ask them if they can help provide you with a solution to manage your debts by possibly lowering the interest rates, or extending the repayment terms.
Similarly, you may be able to consider a more formal debt management plan which is an agreement between you and your creditors. Debt management plans help reduce outstanding, unsecured debts over time to help you regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself.
Alternatively, as you are working there is still time to consider a traditional mortgage. As long as you have managed your debts without getting into any arrears, or adversely affecting your credit rating, this could be a solution. The only stumbling block may be the term over which they will lend given your age, the resultant monthly payments and your preferred repayment method – capital and interest, interest only or no payments at all.
Ultimately this decision will affect your inheritance and is a matter to discuss with an adviser.
Should the term of your residential mortgage be a problem, then you could consider retirement mortgages or RIO’s (retirement interest only mortgages) which will allow you to borrow into retirement. To qualify, lenders would need to assess your pre and post-retirement income to ensure it’s affordable. Therefore, I’d need further information on this to qualify on their availability.
Lastly, we have flexible, lifetime mortgages, more commonly termed as ‘equity release’. The difference between these schemes and mortgages is that lenders don’t consider your income or expenditure as they do with residential mortgages – neither do they take into account the debts you currently have.
The amount you can borrow with a lifetime mortgage is determined by your age and the value of your home. As you are 59, you maximum you could borrow would be 31.5% of the value of your home. So, to borrow the £45,000 needed to repay your debts, your house would have to be valued at a minimum of £143,000.
You also have a variety of options when it comes to lifetime mortgage plans that best meets your needs.
You could consider a drawdown lifetime mortgage where the lender would provide a cash facility of say £70,000 and advance you £45,000 of this to clear your debts. The remaining £25,000 would be held in reserve should you need access to more cash in the future. The advantage of drawdown is that you’re only charged interest on the initial £45,000, not on the £25,000 whilst held in reserve. The money in reserve would only be charged interest should you choose to withdraw any of it in the future.
Lifetime mortgages also come with several flexible repayment options, like mortgages, such as making monthly interest payments through an interest only lifetime mortgage, or more commonly using voluntary payment plans to make payments when you choose to. As you are still working full-time and you will be clearing your debts, you may have surplus income to put towards the interest being charged and possibly reducing the capital, should you wish to do so.
The benefit of interest only lifetime mortgage plans is that by servicing the interest, only the initial amount borrowed is repaid when your plan ends. However, you can also stop making interest repayments in the future when you stop working and switch to what is known as ‘roll up interest’ plan and then consider making flexible payments again in the future.
Voluntary payment plans allow you to make ad-hoc repayments between 10% to 40% of the amount borrowed each year.
This option could also be an effective way of managing your final balance, if that is of interest to you. They aren’t affordability checked as the choice of making payments is yours. They can be used to control the future balance, even pay it off with no penalty after 3 years using the 40% voluntary payment allowance!
Finally, you can choose for the amount borrowed and accrued interest to be repaid when you move into long term care or die. This means no payments are made and the balance will compound over time.
I recommend that as your next step, you speak to one of the independent and expert advisers at Equity Release Supermarket, who will be able to guide you through all your options.
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Question
Funding care costs for my father
My sister and I are in discussions with our local care providers about offering support to my elderly father in his home. He is adamant he wants to stay at home and be supported by carers rather than go into a home, and that’s fine with us.
The problem is money – the cost is quite onerous. My sister and I are looking into the idea of equity release to help fund his care, but my father is not keen. We don’t have power of attorney so we wondered how we might proceed.
Our father is concerned about us losing our inheritance if we used the money for his care. But we really don’t mind as we feel the cost of his care is more of a pressing financial concern. Can we, as his next of kin, seek to start the process or are there any other ways we might be able to release some of the wealth from the home without it impacting too harshly on our inheritance?
Answer
When it comes to taking out an equity release plan, this must be the decision of the homeowner if there isn’t a financial power of attorney in place, and so it has to be your father who is happy to proceed. However, depending upon his health, and with his agreement, it may be prudent to start the process of obtaining a Lasting Power of Attorney for him to allow you and your sister to help your father manage his financial affairs in the future.
Equity release is often used to pay for care costs at home and there are lots of options for your father to consider – if he’s concerned about the impact on your inheritance.
I’ll briefly outline these for you now, for you to share with your father. If he’s then more open to considering equity release then please do get in touch with us at Equity Release Supermarket. It costs you nothing to speak to us and discuss the options with an expert adviser. Our advisers are also more than happy to meet your father and you at home, or we can talk over the ‘phone or by video call – whatever works best for you.
Your adviser would check your father has claimed any benefits or grants that may be to help with his home care costs. It is worth contacting social services who may be able to provide a care package which is a combination of services put together to meet a person’s assessed needs as part of the care plan arising from an assessment or a review. It defines exactly what that person needs in the way of care, services, or equipment to live their life in a dignified and comfortable manner.
We have an equity remaining calculator available on our website, which will give you a rough idea of the inheritance your father could receive when the plan ends. You may be surprised by how much this may be, when you factor the current low interest rates (which are fixed for life) and potential house price inflation.
Lifetime mortgages are the most popular type of equity release plan and they come with a range of flexible, ‘inheritance maximising’ features.
Firstly, there are plans available that are designed to manage the interest accruing on the plan, without making any interest repayments or overpayments.
Drawdown lifetime mortgages, as the name suggests, provide a cash facility which can be drawn against at any point in the future. Once an initial minimum of £10,000 is borrowed, the remainder of what the provider will lend, is held by them for you to dip into as and when needed. This could be monthly to pay for your father’s care. There is no cost to do this and the beauty of drawdown lifetime mortgages are that interest is only charged at the prevailing fixed interest rate on the amount borrowed – which can be an effective way to maximise the inheritance your father leaves for you.
If your father has the income (or indeed if you and your sister could help), then an interest only plan could be used to repay the monthly interest accruing so that only the initial amount borrowed is repayable when the plan ends.
Lastly, if making regular repayments isn’t an option then a lump sum plan could be used to borrow the maximum available which could be further enhanced through an ‘enhanced’ lifetime mortgage if your father has any qualifying, existing medical conditions.
All lifetime mortgage now come with a voluntary repayment option, which means that if your father or you have the funds in the future, you could repay up to 10% of the amount borrowed each year, which again will reduce the final amount to be repaid – and safeguard any inheritance.
Lastly, many plans now come with an ‘inheritance guarantee’ protection whereby a % of the price of the property can be secured for you and your sister when your father passes away.
For example, if your father’s home is worth £250,000 and he wants to ensure that you receive at least 30% of its value (£75,000) then this can be done using an inheritance guarantee. The only caveat is that this will reduce the amount your father could borrow, as the lender will then consider lending on £175,000 instead of £250,000.
I hope that’s given you an introduction to the ways lifetime mortgages can be effectively used to maximise your inheritance and should your father want to talk to a specialist (with you there of course) then your local Equity Release Supermarket adviser would be more than happy to help you.
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Question
How much of my property’s value can I release?
I would like to release equity from my home, but I have been told there is a limit to the percentage of my property wealth I can access? Is this correct? I am 61 and would like to release at least half the value of my property.
Answer
Being later life specialists, we have access to various ‘equity release’ schemes in the market. These can range from lifetime mortgages to home reversion plans and retirement interest only mortgages (RIO’s). Each of these has their own way of calculating how much you can borrow.
We would also check why you need the full 50% upfront, as there may be better options of withdrawing some of the initial funds, if the full amount is not needed in the first 12 months.
If you are referring to lifetime mortgages, to calculate the maximum you can borrow, lenders will take into consideration the age of the youngest homeowner (who must be at least 55), the value and location of the property and your health if applicable.
The older you are, the more you are able to borrow and as you are 61, the maximum you could borrow would be around 35% of the value of our home.
If you have any number of pre-existing medical conditions, the amount you could borrow increase to just over 44% of the value of your home.
While this is less than the 50% you are looking for now, there may be options for you to borrow more in the future as you get older, dependent upon the value of your home increasing.
Should you have a reasonably good retirement income that would support the borrowing you require, then a Retirement Interest Only (RIO) mortgage may be appropriate. This is an interest only mortgage that runs for the rest of your life and the provider will only want the capital to returned on death or moving into long term care, assuming you adhere to the terms and conditions of the loan.
The amount you can borrow is based on your income and credit. A new lender – Livemore Capital, that’s just launched into the RIO market can potentially lender upto 75% of your property value. As a specialist in RIO’s, they have a different approach to mainstream lenders and can potentially release upto £177,000 for someone earning £20,000 per annum with average yearly outgoings.
As lenders regularly launch new plans, I recommend that you speak to your local adviser at Equity Release Supermarket, who will be able to talk through all your options and find a plan that best suits your needs, both now and in the future.
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