Four Questions to Ask Before You Downsize

Once the children have flown the nest or a larger home becomes too much to maintain, downsizing becomes a comfortable option for many people all over the UK. A common reason for this is to use the difference in property values to release money, often to assist with retirement funding or provide financial assistance to a family member.

However, downsizing isn’t always the best choice for some homeowners, especially with alternatives such as equity release available. Before you decide to sell your family home simply to release some of its value, consider these four questions.

1 – Are you ready to leave your home?

Moving somewhere new can often feel like a fresh start, but if you’ve lived in the same property for many years and raised your family there, leaving it behind can be difficult. Every room holds cherished memories, so it’s understandable that lots of people grow very attached to their homes.

If you’re sure that you’re ready for an exciting new chapter that’s great, but don’t feel forced to leave your property if you don’t want to. An equity release scheme would allow you to access some of the money tied up in your home without you having to leave it.

2 – Do you know where you would go?

Feeling happy about moving out is only half of the decision – you will also need to find somewhere that you would live next. This can be a big decision, particularly if you live alone. Relocating to a different part of the country may help you get more for your money, but you might miss the company and support of friends and family living nearby. Staying within a community will mean that if you have car problems or a health issue, you won’t feel stranded.

3 – Will downsizing actually balance the budget?

Depending on your current home and the type of property you’d like to move to, you may find that you are left with less capital than you had imagined. You should also factor in the costs of moving, like estate agents’ fees, conveyancing fees, the price of a survey, stamp duty and removals. Even once you’ve moved in, ongoing costs of living (like bills, management fees or ground rent) can all add up.

Have your home valued by an estate agent or surveyor and research the price of properties that you would be happy to move to, looking at their size, location and amenities. Compare the difference in house prices and the cost to work out whether a potentially-stressful move is worth it financially.

4 – When is small, too small?

You might be tempted to buy the smallest home you can find, focusing on how easy the housework will be and how little furniture you’ll need. This might be a disadvantage if you’re used to family and grandchildren coming to visit – never underestimate the value of a spare room! You will also need to get rid of a substantial amount of your belongings, which you might not be ready to do. By staying in your current property, you can hold onto all of your most treasured belongings and simply have a thorough de-clutter of all the items you don’t want.

If you decide that you’re not quite ready to move out of your home, an equity release scheme may be a good option to access some funds. Just like moving, equity release isn’t for everyone so if you want a free consultation to discuss your situation, please get in touch. You can find answers to commonly asked questions about how equity release works here.

What is the best way to release equity from your house?

Equity release allows homeowners to use the money they have invested in their home without having to move. Whether to cover a pension shortfall or to pay for a single, larger expense, using an equity release scheme is one way to make ends meet without having to leave your home.

There are two main types of equity release, with different benefits and drawbacks.

Lifetime mortgages

Lifetime mortgages involve borrowing a percentage of your home’s value, which gets paid back when you pass away or decide to sell your home. Most lifetime mortgages are offered with a fixed-rate interest that ‘rolls up’ over the duration of the loan. This means that debt can build quickly, although the Equity Release Council provides a guarantee that borrowers will never have to repay more than the value of their property.

Lifetime mortgage options include:

  • Lump-sum loans. You borrow a lump sum, for which the interest compounds each year until you go into long-term care or pass away.
  • Drawdowns. This option allows you to withdraw a smaller amount and draw down more money when you need it. Interest only accumulates on the money you’ve actually borrowed, which can make the overall cost lower.
  • Interest repayments. Some lenders will allow you to make interest repayments over the duration of the loan, which can go some way to reduce the final repayment.

There are drawbacks to having a lifetime mortgage, such as losing means-tested benefits. Costs can also escalate quickly, meaning that you may end up leaving little of your property’s value to loved ones after you pass. Most lenders have strict eligibility criteria (such as a minimum age, and minimum loan amounts) which may mean that a lifetime mortgage is not the best option for your circumstances.

Home reversion

Home reversion schemes involve selling a proportion of your home to the lender at lower than market value. You won’t need to leave your home, but when you pass away or move into care, the lender will get the same proportion of the property’s sale price.

Compared to a lifetime mortgage, it can be more difficult to estimate the cost of home reversion, as it ultimately depends on the sale price of your property.

Home reversion schemes will also have stringent eligibility criteria, with schemes only available to those who are 65 or older. Younger borrowers are often required to sell a higher portion of their home, too. For example, some plans will demand 70% of your home’s value for only 20% in advance.

Which equity release scheme is better?

Choosing the most favourable scheme depends entirely on your circumstances, and you should always consult with a regulated, independent advisor before making a decision. If you would like a free initial consultation about equity release options, please get in touch. As a specialist equity release advisor, I can explain each type of equity release and how it relates to your situation, helping you to choose a plan that allows you to comfortably enjoy your retirement.

Equity Release lending more popular than ever!

A quick look at the latest quarterly figures released by The Equity Release Council paints a convincing picture. Between July and September this year (Q3 2017), the over-55s withdrew £824 million of property wealth from their homes using equity release plans.

Compared to the same period last year (Q3 2016) when equity release lending totalled £572 million, this year’s figures represent a 44% increase year on year. In fact, it’s the highest amount for any single quarter since activity tracking began in 2002. The Equity Release Council is the industry body representing over 650 providers, financial advisers, solicitors and other industry professionals. It replaced the former Safe Home Income Plans (SHIP) in 2012.

New equity release plans up by 1/3

What’s more, the number of new equity release customers increased by just over 1/3 year on year for Quarter 3, with 9,905 new plans agreed. Another 6,849 existing customers used instalments to draw down funds, with an extra 1,138 obtaining further advances on their original plan. In total, the equity release sector saw activity from nearly 18,000 new or returning customers in Quarter 3 of this year.

Demand for drawdown products is rising

Around 3/4 of all new equity release products taken out were on a drawdown basis. Customers typically release smaller amounts of equity to start with, therefore reducing the build-up of interest over the duration of the plan. This also has the benefit of providing customers with the flexibility to unlock additional funds via future instalments as and when required.

The Chairman of the Equity Release Council, Nigel Waterson, said: “The combination of rigorous safeguards and flexible products in today’s market is one reason why housing wealth is now being used to support a wide range of financial goals. These range from boosting pension income and supporting retirement lifestyles to funding home improvements and adaptations, consolidating debts and providing a living inheritance to younger generations.”

If you’re a home owner wishing to release some of the equity tied up in your property, an experienced Mortgage and Equity Release Specialist, such as myself, can help you choose the right equity release plan. For further information or to arrange a free consultation, please get in touch.

How Does Equity Release Work?

An Equity Release scheme provides a tax-free sum of money, using the value of your current home. As long as you are a UK homeowner aged 55 or older, equity release can provide a lump sum or steady income to make your years of retirement more comfortable.

What does Equity Release involve?

There are two main types of equity release plan in the UK; a lifetime mortgage and a home reversion plan.

A lifetime mortgage plan is the most popular scheme, and allows you to retain complete ownership of your home. With a lifetime mortgage, you borrow a proportion of you property’s value, which will not have to be repaid until you sell your home, or in the event of your death. The interest for this mortgage is “rolled up” until the end of the loan, when it will be payable by your estate. To help you decide if a lifetime mortgage is right for you, we provide an obligation-free Equity Release Calculator.

Home reversion schemes involve selling a percentage of your home in exchange for a lump sum. You can remain in your home rent free for as long as you need, and the loan is repaid when the house is sold.

What are the benefits of Equity Release?

The main benefit of Equity Release is that you can access money tied up in your home, without having to move out or make any repayments during your lifetime. The nature of an equity release scheme also means that the amount of inheritance tax to be paid by your estate is often reduced, and the NNEG (no negative equity guarantee) protects your loan in the event of a market downturn.

Using an equity release scheme to unlock cash is a simple way to provide income for the rest of your life, however it’s important to keep in mind that it will impact the value of your estate, and can also affect any means-tested benefits you are currently entitled to.

The equity release market is fully regulated by the Financial Conduct Authority (FCA), and your options should be fully explained to you before you sign up to any equity release plan.

Should interest rates be a client’s no.1 priority?

When discussing Lifetime Mortgages, on almost every meeting with clients, the first question they ask is, what is the interest rate?

There is no doubt the interest rate charged is very important as this provides an indication of how the long-term loan will build up. But it is only one of the aspects we need to consider when providing clients with ‘best advice’ and its only once we have explained in more detail how these products work and carry out an in-depth fact find that we can identify the client’s actual needs. The outcome of the fact find may be to provide the most competitive interest rate, (but not necessarily the cheapest!) while at the same time providing the client with a product which better meets their individual requirements.

For example, for a client who knows they will be repaying off their loan within a specific timeframe due to perhaps a maturing investment, a pension pay-out or a sale of a second property, then maybe a lender who has a clearly defined early repayment charge, such as those provided by lenders such as LV=, Hodge or Retirement Advantage may be a better option than those with a potential charge offering a lower up-front interest rate but perhaps with a much larger charge for repaying the loan.

The client may prefer to make a monthly payment, which reduces the effect of the rolled up interest applied to Lifetime Mortgages. This is a facility offered by a number of lenders, or they may choose to specifically set aside a percentage of the property value as an inheritance guarantee for their beneficiaries.

Clients may prefer to take advantage of a fee free valuation which allows them to make an application without incurring up-front costs, or they may prefer to take advantage of a cash-back, an incentive from lenders which can be used to off-set their setting up costs or they make prefer to take advantage of those lenders providing additional lending when considering their state of health.

These benefits, which once explained are often of more benefit to clients rather than the rate of interest applied to their loans, but what is most important, the cheapest rate or a lender meeting the specific needs and requirements of the client?

By providing professional advice, rather than being nothing more than an order-taker, I would suggest that meeting the client’s specific needs is more important than simply providing a client with ‘the best rate’.

We must not forget the bank of Gran & Grandad!

We regularly hear and see comments about the role of the ‘Bank of Mum and Dad’. This comes as no surprise as many who already retired are now in a position to provide additional funds for their children…and many are happy to do so as they can see the benefits of the money and the way it’s being spent today rather than their children receiving the cash on their death, by which time they may not need the money so urgently.

However, it’s all too easy to forget the role that Grandparents often play providing cash, not just to their children but also to their grand-children.

Twice in the last few years I have been asked to raise money to pay educational fees. In both cases this was due to the son being made redundant and rather than see the grandchildren taken out of their private school, they have made provision for the fees to be paid by releasing equity in their home.

The case made was that this way, the grandchildren would be able to stay in their present school and the Grandparents can continue to make the financial contribution to provide ‘the best education they can afford’.  In these situations, I’m reminded of the start to the television series, The Inbetweeners where one of the cast members, Will, has been pulled out of private school as his mother can no longer afford the fees due to her divorce and we then see the harassment he receives from fellow school pupils when moved to a state school.

I’m sure that this series isn’t a true representation of what would happen but I guess that the thought of moving children from private to state education doesn’t appeal to those involved.

But it’s not just providing educational fees. We see the grand-parents, who can be in a better financial position than their children, providing the deposit for the grandchildren to enable them to get into the housing market, effectively by-passing their children’s inheritance.

I just hope that when this is done that the work carried out by their solicitors protects the money should the grandchildren later marry or enter into the purchase of a property on a joint basis with a future partner.

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