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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
Reasons for releasing equity – are there any limitations?
I am hoping to go down the equity release route because I would like to release some money from my property to help my grown up children.
Both my son and daughter are in their late twenties, struggling to afford the cost of living in London and one has had a really hard time financially due to Covid.
I am hoping to give them each £80k from my property which is worth around £600,000 so they can get themselves on their feet. Then I plan to release £200,000 (if this is possible) with £40k to go into a savings or investment plan so I can easily access it if there are any other issues in the future.
I have two questions. Firstly, am I allowed to release cash in this way? I am wondering here if there are any tax implications?
Secondly, can I state that this money is given to my children for specific purposes – ie house deposit, cars etc? I trust my children but want to safeguard the finances in case of influence from future partners.
Answer
The amount of money you can access through equity release depends upon the value of your property and your age. The rule of thumb is, the older you are, the more you can borrow.
Unfortunately, you haven’t included your age, but I will estimate that you are 65 for illustrative purposes.
At 65, the maximum you could borrow is up to 40% of the value of your property – which in your case would be £240,000. As you are looking to borrow £200,000, then the value of your home and your age (if 65 or over) are more than enough to meet your needs.
As a company, we would only recommend the amount you withdraw from your property is the amount you initially need.
We wouldn’t advocate placing any money from equity release into an investment scheme.
Only for emergency fund purposes would any money ever be recommended be left on deposit, and this would need to tie in with your income and whether any means tested benefits are received.
Hence, rather than borrowing the full £200,000, with £40,000 going into savings, you may want to consider a type of lifetime mortgage (the most popular equity release) called a drawdown plan.
Here, you are offered say a total loan facility of say £200,000, from which you take the initial £160,000, leaving £40, 000 in the drawdown facility. This money is on reserve for you to borrow anytime in the future and with no further administration charges.
The advantage of a drawdown plan is that you only pay interest on the initial amount borrowed (£160,000), then on any subsequent withdrawals in the future. Hence, rather than taking the whole amount upfront, taking money via drawdown will reduce the overall interest accruing on your plan and the final amount to be repaid.
All money released via equity release is tax-free and so there are no immediate tax implications in you gifting your children £80,000 each. That said, there may be tax implications with what your children do with the money which they will need to consider.
As you mention that one of your children has suffered financially through Covid, they should also consider the implications of receiving such a large sum of money if they are claiming any benefits.
Gifting money to children can have Inheritance Tax implications both positively and negatively. It can help to reduce your Inheritance Tax (IHT) liability, which is currently payable at 40% on any estate valued at over £325,000 for this tax year. (This is the threshold for an individual. It doubles if you are in a legal partnership.)
As long as you live for seven years after the gift is made, it is not then included in the value of your estate for tax purposes. Under such situations we would always insist you consult a tax specialist to help you.
With so much to think about, I recommend that as a next step you speak to a qualified, independent and whole of market adviser (i.e. one that isn’t tied to a specific lender) – such as all the advisers at Equity Release Supermarket – who will be happy to answer all your questions at no cost to you.
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Question
What’s the maximum sum we can take out using equity release?
My husband and I own our house outright – it is worth £350,000 and located in outer London. We would like to investigate equity release as a way of making some adaptations to the property.
Is there a maximum amount we are allowed to borrow on a property of this value? For example, if we borrowed £200k would that be too much, taking into consideration compound interest and any other factors? My husband is 81 and I am 75.
Answer
The maximum you can borrow through equity release depends upon the age of the youngest borrower and the value of your property. As you are 75, the most you could borrow is 50% of the value of your home – which is £175,000. If you have any pre-existing medical conditions, you could borrow up to 54.5% – or £190,750.
If you do need to borrow £200,000, then this wouldn’t be possible through a lifetime mortgage – if your house is valued at £350,000.
My question would be – how much do you actually need? Have you itemised the work to be done to reach this total? Do you need all the funds immediately? Could they be taken over time when the actual works are needed? Is a grant available for any of the adaptations you require?
These are just some of the questions as advisers we would ask you to understand you exact requirements. The reason we’d suggest only taking what you require, is two-fold. Protect your future balance/inheritance and also because the higher the loan-to-value of your property, the higher the interest rate you will be offered.
Assuming you’ve calculated you still need £200k, but not the whole amount upfront, then you could opt for the flexibility of a drawdown plan. With drawdown you could take the initial amount required – say £80k for example, leaving the remaining £120k you will need over time, in a cash reserve.
Managing the funds this way means you’re only charged interest on the initial £80k, not on the £120k left in reserve. You will only pay interest on the money in reserve when you decide to withdraw any. Taking this approach will obviously reduce the interest charged over time, meaning a greater inheritance for your beneficiaries.
There are though other types of ‘later life lending’ that you could consider – Retirement Interest-only (RIO) mortgages or retirement mortgages. I won’t discuss these in detail here as I have provided links to the pages on the Equity Release Supermarket website, but with RIO mortgages for instance you can borrow up to 75% of the value of your home – or £262,500.
These are residential mortgages, which means that you must pass the lender’s affordability checks to qualify, you must be able to meet your monthly repayments (both now and in the future if something happens to one of you) and you home may be repossessed.
None of these apply to equity release, but as you mention, interest would compound on the amount you borrow, if you chose not to make any form of repayment.
That said, there are many ways to mitigate this using a lifetime mortgage – either through regular monthly repayments of interest or through making adhoc repayments as and when you can afford to.
Our equity remaining calculator will give you an idea of the value of your estate when your plan is repaid – if the size of your inheritance is important to you.
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Question
Equity release options for homeowners with a mortgage
Can I take out equity release if I still have a mortgage? I own a property and still have five years left on the mortgage term. However, I would like to take out some cash to boost my income. Is this possible? I am 60 and retired.
Answer
Yes, you can take out equity release if you still have a mortgage outstanding, but it is the lender’s stipulation that it must be immediately repaid with the money you borrow through equity release. So, if you borrow £90,000 on equity release (which is a typical amount) and your mortgage is £50,000 – then you have £40,000 left to spend as you wish in the future.
There are other factors that should be discussed before however, especially as you still have five years remaining on your mortgage, which may offer a lower interest rate than equity release. Hence, you would need to consider if you did switch to equity release just to improve your income – is this financially a good idea?
Other avenues to explore to boost your income are checking you have access to all pensions and utilising any of your savings or investments if available. Are there any benefits you are eligible for and a great free way of checking that is via the benefits website – Entitledto.
You could consider the rent-a-room scheme which allows you a tax free income of up to £7,500 by taking on a lodger in your home. This may not be suitable for everyone but does come with financial benefits that could assist with your income shortfall.
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Question
Searching for equity release – are comparison sites any good?
My mum and dad are considering taking out equity release and we are wondering where to find the best deals or policies. Are there any websites where we can look for good deal – comparison sites, for example? Or should we speak to individual companies?
My parents are not certain this is the right route at the moment, so we just want to ‘window shop’ to gain an insight. Thanks for your help.
Answer
There are only two websites that provide comprehensive, whole of market comparison tools that cover all the later life lending options – equity release, retirement interest-only (RIO) mortgages and retirement mortgages. Both of these are part of the Equity Release Supermarket family – equityreleasesupermarket.com and compareequityrelease.com
Here you will be able to see all the latest deals from all the lenders, including their interest rates, incentives and offers.
Plus, there are a wide range of calculators available to give you an idea of the maximum your parents could borrow.
I would guard you against using many of the search engine advertisers that claim to find you exclusive offers and deals or allow you compare the best equity release deals. The majority are making false claims and are simply designed to get your personal data which they then sell onto the highest bidder.
While some of the big brand comparison sites (that advertise on TV a lot) now have relationships with some of the equity release brokers, their websites offer very little information, and you won’t be able to see any of the available deals on them.
You could of course speak to the lenders directly – but they will always suggest you seek independent equity release advice, or their own plans if they advise on them. As there are now well over 400 different plans on the market, you are only ever going to get a selective view by speaking to a lender.
I’m very proud of our websites that we’ve developed over the years and they are still the only source for those looking to compare deals and better understand what’s available, before they decide to take the next step and speak to an adviser.
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