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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
Can I use equity release to gift money to my children?
My wife and I own a house which has been valued at £850,000 and we are mortgage free. We have four children, two of whom are desperately saving for a deposit on their first homes.
They are clearly struggling to afford more than a matchbox at the moment with the way property prices are rising! As such we would like to help them by way of releasing some of the cash from our home.
We have two options: one is to downsize and the second is to release equity with a plan or lifetime mortgage. However, we are not sure whether the equity release method is allowed if we are gifting the money to family members? Are there tax concerns etc? Equally, will the mortgage lenders who our children borrow from accept cash from this source? Any advice gratefully received on this matter.
Answer
The money you release through a lifetime mortgage (the most popular type of equity release plan) is yours to spend as you wish and is tax-free. So, there would be no problem at all with you using your money to gift to your children. This is a very popular way for people to use their money and at Equity Release Supermarket, around 15% of our customers choose to utilise some of their money to help their families financially.
While the money you release is tax-free, there could be Inheritance Tax (IHT) implications with the money you gift to your children. If you were to die within seven years of making the gift, then IHT could be payable on the amount gifted depending upon the total value of your estate at this time. While we don’t provide IHT financial planning at Equity Release Supermarket, one of expert advisers would be able to review your financial situation and recommend if you should speak to an IHT specialist.
Downsizing is also an option to release some money – but the IHT implications of gifting thereafter could still apply, and you also have the additional expenses of moving home to consider (such as Stamp Duty), as well as the emotional upheaval of leaving your family home.
Mortgage lenders also take different views on sources of deposits, but most will simply require proof from yourselves that you have made a gift to your child – to ensure that their anti-money laundering requirements are met.
While I don’t know your ages, I will assume that the youngest is 65 and at this age, you could borrow up to 41.9% of the value of your home. If your property is valued at £850,000 then this would be £356,150 – which I hope would be enough to support your children.
Please bear in mind that you are looking to gift to only two out of your four children. By gifting to just two, we’d recommend you discuss the implications on the effect gifting makes to your estate, and the subsequent inheritance of the two children who are not receiving a gift. There are features that can be included in your lifetime mortgage to protect their inheritance if necessary.
The range of lifetime mortgages available to you has evolved enormously over the last few years and depending upon the plan you choose, there are several flexible options if you would like to make any repayments (to manage the accruing interest).
The majority of lenders now have fixed term early repayment charges in place – allowing you to repay your plan in the future without penalty. Some lenders also offer a downsizing protection feature, allowing you to move to a smaller property once the plan has been in place for a number of years (e.g. five) and repay your plan without penalty.
Moreover, if one of you should die or move into long term care you may want to move home, and many lenders also offer a period of time (e.g. three years) for you to do this and repay your plan penalty free.
If you are at all concerned about the impact that equity release could have on the value of your estate and the money you leave behind for your loved ones, then we also offer a calculator to access the value of your estate when your plan is eventually repaid – try our equity remaining calculator.
As next steps, I suggest you speak to one of our expert and independent advisers to discuss our options, free of charge.
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Question
Can I release equity at the age of 50?
I have recently gone through a divorce and my husband and I decided to make things easy by each taking one of the two properties we owned. I have obtained full ownership of the coastal property we used for holidays and have relocated to the seaside which means I have had to leave my job.
As such I am looking for other sources of income and wondered if I could use equity release to help me fund my day-to-day expenses. I am, however, 50 (51 in February next year) and understand the lowest age I can apply is 55. Are there any exceptions to this rule?
Answer
Unfortunately, the minimum age to take out a lifetime mortgage is 55, but there are other later life lending options you could consider if you need to raise additional funds. These are Retirement Interest-Only (RIO) mortgages and retirement mortgages – which are available from age 50.
The caveat here is that you must either make monthly interest, or capital and interest repayments and so lenders will assess your income and outgoings (as well as your credit rating) to ensure that you can adequately make these repayments both now and in the future. Given that you have had to leave your job, these may not be an option for you.
Alternatively, a home reversion provider, Crown, has just relaunched a range of home reversion equity release plans that could meet your needs. These are also available from age 50, but they work very differently from the more popular lifetime mortgages.
With home reversion plans, you sell a percentage of the value of your home to the reversion provider (which can be anywhere up to 100%) and in return you receive a tax-free cash lump sum and the right to live in your property until you die or move into long term care.
You no longer own your property though, as you have sold it to the lender. If you only sell a percentage of the property initially (e.g. 50%), you will have the guarantee of being able to access the remaining 50% anytime in the future. If this isn’t taken, then your estate will leave a guaranteed 50% of the final value of your property to your beneficiaries.
As with lifetime mortgages, your income and outgoings are not taken into consideration with home reversions and so this could be an option for you to explore. So, I would certainly recommend you speak to a suitably qualified adviser – such as one at Equity Release Supermarket.
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Question
Equity release – how might it impact benefits?
I have heard taking out an equity release plan may impact any means-tested benefits I will receive in years to come. I am not sure which benefits this includes but I am worried it could impact my state pension? Can you advise please? I am 62 and live alone.
Answer
Equity release can indeed impact any means tested benefits you may be claiming now, or indeed in the future. You mention the impact to your State Pension. To put your mind at rest, the State
Pension isn’t a means tested benefit; these include things like Council Tax support or Pension Credit. As you are 62, you can’t claim your State Pension for a few years yet and so it may be worth checking your current forecast on the government’s website – https://www.gov.uk/check-state-pension
Equity release could impact means tested benefits because to qualify for them, you must have savings below a certain threshold. If you were to then take out equity release as a single lump sum, then your savings may rise above the thresholds imposed by the Department of Work and Pensions (DWP) or local authorities. These vary, but are typically around the £16,000 mark.
As part of the equity release process, your Equity Release Supermarket adviser will run a full benefits check for you, to access your financial situation. If you do claim any means tested benefits which could be impacted by taking out equity release, there are ways to potentially mitigate or reduce the impact on your benefits.
For instance, if you take out a type of lifetime mortgage called a drawdown plan, the minimum amount you initially borrow can be tailored so that your total savings remain below any benefits threshold and further future borrowing can also be managed in the same way.
Obviously, if you wanted to borrow a larger amount of money, your benefits are likely to be impacted and so I would suggest that you talk through your current financial situation with an expert equity release adviser.
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Question
Changing deals – can I refinance to a different rate?
I took out a lifetime mortgage back in 2017 and my deal had a fixed rate of just over 6%. I have seen rates have fallen quite significantly since that time and have been considering the prospect of remortgaging to a cheaper deal.
I wondered if you could help me ascertain, firstly, if this is possible and secondly whether I would be able to take advantage of deals across the market or if I should stay with my current provider? I am aware there will be an exit fee.
Answer
The answer to your question really does depend upon the type of plan you took out, and the lender, back in 2017.
As you mention, there may be an exit fee to pay your current lender and the viability of switching to a plan with a lower interest rate (either with your current lender or a new one) really does depend upon the size of any early repayment charge (ERC) versus the money you’ll save over time on a new deal.
As lifetime mortgages are designed to run for the rest of your life – not necessarily over the short term – the penalties for early repayment can be as high as 25% of the amount borrowed with some lenders.
Dependent upon the lender concerned, lifetime mortgages can either come with variable or fixed ERCs.
Variable ERC’s are normally associated with the movement in government gilts. As their rates fluctuate, they’re not suitable if you are considering repaying a lifetime mortgage early, simply due to the fact the future penalty when taking out the plan is an unknown.
On the other hand, all lenders now offer fixed ERCs where plans come with a pre-determined penalty over a set number of years – very much like a residential mortgage.
With lenders such as Canada Life, these ERCs can be as short as eight years – after this period the plan can be repaid with no penalty.
So, we’d really need to know more about your current deal before we can look at whether it is in your financial interests to switch.
At Equity Release Supermarket, we conduct an annual review with our customers and a full ‘switch analysis’, to see if it is indeed in our customers’ best interest to switch plans.
We also offer a ‘switch plan’ calculator on our website, which is free for you to use.
You’ll find this useful to get a better understanding of the potential ‘break even’ and ‘switch point’ and how much money could be saved by moving to another plan with a lower interest rate over time.
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