If you find yourself in need of extra cash in retirement, you might consider equity release.
You may be looking to make home improvements, supplement your pension income, or pass some of your wealth on to the next generation while you’re still around to enjoy the good it brings. Either way, unlocking the value tied up in your home might be the answer.
The most popular form of equity release is a lifetime mortgage.
Keep reading for three reasons why it might be right for you.
1. You still own 100% of your home
A lifetime mortgage allows you to take out a loan secured against the value of your home. If you are over 55 and own your house, you can typically borrow between 18% and 50% of the property’s value, dependent on your age (with the higher percentages available as you get older).
Interest accrues on the borrowed amount, but you still own 100% of your property. This means that if you decide to sell your home and move house in the future, you can do so – as long as your lender agrees.
On death, or when you enter long-term care, the original loan amount plus the accrued interest is paid back, via a deduction from the value of your estate.
2. You can opt for a single lump sum or take a series of smaller payments
If you decide on a lifetime mortgage, you’ll still have a choice to make about how you receive the loan amount. You can take the money as a one-off lump sum or opt for a flexible lifetime mortgage that allows you to drawdown a series of smaller payments, timed for when you need them.
For projects that require a lot of cash immediately, and in one go – such as a home renovation – a lump sum might prove to be the best option.
For ongoing payments – like the cost of domiciliary care, for example, or gifts to loved ones as they reach life milestones – smaller payments might be easier to manage. They can also have several other benefits.
You only pay interest on the amount of loan you have taken, so taking smaller loans means that you won’t be paying interest on a whole lump sum held over many years. Instead, you’ll pay interest on a series of smaller amounts with the loans held over a diminishing length of time.
The current economic climate of low interest rates and high inflation might make smaller payments even more attractive.
Taking only what you need means that you’ll already have the money earmarked and be ready to spend it as soon as it is received. Take the entire loan in one go, however, and you could end up with an excess amount sitting in your cash savings. If the interest rate on your account is less than inflation, your money will be effectively losing value in real terms.
3. A lifetime mortgage can have Inheritance Tax advantages and allow for “giving while living”
Rather than having your wealth locked up in your property, where it could be subject to IHT at 40% on death, you might opt for giving while living. This option could be particularly appealing following the recent freeze to IHT thresholds (the nil-rate and residence nil-rate bands) until at least 2026.
(Read our recent blog, ‘How “stealth taxes” will affect your finances in 2022 and beyond’ for further information.)
Choosing a lifetime mortgage and then taking advantage of HMRC gifting rules to pass your loaned amount on to the next generation has several advantages.
You’ll be able to pass on your wealth to those that need it, earlier in their lifetime, and when it has the opportunity to do the most good.
Not only could the money you gift be used to purchase a first home or support a young family but you’ll still be around to reap the benefits of your generosity, by seeing the good your money has done.
You can use your annual exemption to gift up to £3,000 a year to loved ones tax-free, while other exemptions allow you to make small gifts (such as for birthday and Christmas presents) and wedding gifts. Money that you gift, which falls outside of HMRC exemptions, could become liable for IHT if you die within seven years.
There are pros and cons to a lifetime mortgage
While a lifetime mortgage won’t be right for everyone, with the correct advice, it can be a tax-efficient way to release money that would otherwise be tied up in your home.
You might use the money to gift a living inheritance, reduce the overall value of your estate, or increase your family’s wealth by using the loan to purchase other properties.
Interest can accrue quickly due to compounding, so it’s crucial that you keep on top of it. You might consider paying it off at regular intervals or taking smaller payments more often to better manage the interest due.
A lifetime mortgage is a lifelong decision and you’ll need to be completely sure before you take the plunge. Speak to us and we can help you decide if it is the right option for you.
Get in touch
If you think equity release might be a good option for you, get in touch. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help.
Please note
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
