Paying an Existing Mortgage
Are you one of the thousands of people with interest only mortgages due to mature but with no means of repaying the capital balance outstanding or the affordability to switch to capital repayment. Combine this with your age and traditional lending criteria in the market and your options may well be limited.
Traditional equity release has NO affordability assessment and NO term restriction giving you the flexibility to manage your property finance to suit your needs at any given time.
Solutions exist where you can pay the interest and even the capital without penalty (subject to the lenders criteria) but without the rigid monthly commitment. Alternatively, you can simply allow interest to roll-up (lifetime mortgage) or ‘sell’ a percentage in your home (reversion).
Leasehold Extensions / Property Purchase
With many retired people having lived in their properties for many, many years this can often result in short leases remaining on their property which can restrict its sale value now/future.
Typically, equity release providers require minimum of 70 years but could be as high as 130 years depending on the lender but equally a long lease will ensure the best sale price / property value is maintained and in some cases can increase a property value.
Lease extensions can be combined with an equity release application so effectively the release is used to fund the cost of the extension (although there can often be ‘upfront’ cost to be covered) so to facilitate release of funds for clients use or simply to extend the lease for future release or sale!
Equally equity release can be used when purchasing property and is exactly the same as when purchasing with a conventional mortgage.
Typical examples of this is people moving to areas which are more expensive or property type ie bungalows which typically cost more than same sized house (in terms of bedrooms).
It’s no secret that the ‘bank of mum and dad’ (this can be extended to the ‘bank of grandparents’) continue to support their children into their 30’s, 40’s and beyond typically this will be for assistance with property purchase for costs (stamp duty, solicitors etc) or more likely deposit.
This isn’t just limited to First Time Buyers, many ‘Second-Steppers or Next Time Buyers’ who are on the property ladder may have started a family and be reduced to one full time and one part-time income or even just one full time income.
The jump up to the next property purchase stretches beyond their means but they need more living space or want the right school catchment area.
Often combined with property purchase so really just shifting asset value from one property to another with the then potential for shared investment growth BUT outside the donors’ estate.
The loss of income can often lead to debt issues which can be difficult to get out of and again this is where we see parents / grandparents able to assist with either ‘pre-inheritance’ gifts of money by way of equity release at a time most needed by their children/grand-children.
They will simply receive less in the future from the estate on death *
By product of creating this ‘debt’ on the estate will be reduced net value on death which would mean reduced inheritance tax to be paid (depending on allowances prevailing at the time).
*This obviously means less equity for use by the donor should they require funds for themselves ie care etc in the future be that the initial capital amount only or accrued compound interest also!
Find Out How Much You Could Release
Inheritance Tax Planning
As you get older Inheritance Tax mitigation options reduce or require donors to ‘gift’ away capital.
This could be to their detriment in terms of their own standard or living or personal security so is obviously avoided.
Releasing equity from their property however and ‘gifting’ this to others in excess of the standard allowances could achieve a reduction in inheritance tax*whilst providing funds for a need in the donor’s lifetime who would see the benefit to the beneficiary, typically children, grand-children etc.
*Providing the donor lives for 7 years from date of gift the value will fall out of their estate for the calculation of inheritance tax of their death and could simply mean less tax payable at that time.
Please note IHT planning should be viewed in the widest of contexts taking into account all assets which should be carried out by a specialist adviser. This example only deals with possible effects of having an equity release plan and does not take into account other IHT solutions that may be appropriate for clients.
The Financial Conduct Authority does not regulate taxation and trust advice.
This could be simply a case of more time for more holidays or the time to indulge in lifelong passions or spending more time with their children, grand-children and even great grand-children.
Whilst their pension income may provide for their regular day-to-day bills and expenses all the extra costs will eat away at lifetime savings/investments or may simply not be tax efficient to take more pension (under the pension freedom rules).
An initial release of equity combined with a facility to access further capital without the need for new advice and legal process can accommodate and be flexible for future needs.
Establishing a ‘reserve’ (Lifetime Mortgage) fund for future use at the outset means simply contacting the lender and requesting further funds from your pre-agreed maximum amount. Further releases are subject to the lenders minimums but typically these range from £2000 - £5000 up to the maximum agreed level and you only get charged interest when you have drawn the additional funds.
Further ‘sales’ of percentages (Reversion) in your home can be used in the same way to fund further needs as and when required therefore only utilising equity when needed and not before.
Typically, equity release is used to provide for replacement kitchens, bathrooms, conservatories, and extensions and for many people it will be the last time they undertake anything significant to their property so they want to ‘future-proof’ so as not to have to worry about matter as they grow older.
We often find it useful to use a ‘drawdown’ or ‘reserve’ product which provides an initial lump sum for the planned works but with the availability of additional funds should they be required in the future as a ‘reserve’. This is underwritten at outset so it’s just a simple case of contacting the lender and requesting additional funds (within the lenders minimum and maximum levels) to be drawn down.
It’s at the point of drawing these funds that interest is then applicable and charged accordingly but not before so some people use this as their plans may take several years or as a back-up for future improvements or emergencies.
Equally applicable to a Reversion plan further ‘percentage’ can be ‘sold’ to provide further release of capital from you home.
This is a lifetime mortgage or home revision plan. To understand the features and risks, ask for a personalised illustration. It may affect your entitlement to state benefits and will reduce the value of your estate. Think carefully before securing other debts against your home. John Whyte is authorised consultant and introducer to The Right Equity Release Ltd which is Authorised and Regulated by the Financial Conduct Authority under 521283.
The Right Equity Release does not charge any upfront fees and offers a range of remuneration options including fee only at 1.5% of the total release, subject to a minimum of £2,000, commission only and fee (typically £995 on completion) plus commission from lender.