Equity release plans, also known as lifetime mortgages, allow those over the age of 55 to borrow against their home. Thanks to decades of rising house prices, for some older homeowners this can mean there is plenty available to borrow. The number of people opting for these plans saw a 40 percent increase year-on-year in 2017, with a record-breaking £3bn being borrowed. It seems using your house to fund your lifestyle is becoming increasingly popular.
The potential benefits are that some plans require no monthly repayments, with interest rolling up on a compound basis. The loan is only repaid when the borrower dies or sells the house, and the total debt cannot exceed the value of the home. The comparatively high interest rates and the compounding effect of the rolled-up interest, however, mean that a lifetime mortgage comes with a risk to any nest egg you may have planned for your children to inherit; as any potential inheritance could be fully eroded once the debt has been repaid on death or sale of the property. Fortunately, if you do feel that equity release is right for you, with some careful planning you can alleviate the risk and be safe in the knowledge that you have something left to pass on.
- Renovate to boost your home’s value
Around 60 percent of people using lifetime mortgages put the money towards home renovations, to increase the value of the estate. One equity release provider is trialling a ‘property refurbishment’ equity release plan, that has just been extended from the capital to several towns and cities around the UK. This plan determines the amount you can borrow by the projected value of the home once the renovations are complete, and could be useful for those living in homes in need of repair who are considered ‘equity rich’.
- Picking a protective plan
Plans are available which shield a portion of your home’s value from your equity release lender. This means you can guarantee that if that portion remains untouched, it can be passed on to your descendants. Plans with ‘inheritance protection’ are now more widely available; where a typical plan would allow a maximum of a 35 percent equity release, these would allow you to release half of that amount.
- Release ‘gifts’ to mitigate IHT
Any financial gift that is given to your descendants will be exempt from tax if you live for seven years. If you’re in good health, you can use equity release to reduce your ‘death tax’ or even bring you below the taxable threshold if you are near the IHT margin. For example, you could support a relative who needs help with their housing deposit, or clear their mortgage now to avoid inheritance tax later. Of course, this comes with its risks as dying within the seven-year time limit, could negate any IHT reduction previously achieved and may bring about an unexpected tax bill for the recipient and in those seven years the interest accrued could wipe out the IHT saving.
Equity release is not right for everyone – if you have any questions around this topic, please feel free to get in touch directly.
Read our Equity Release Guide for a detailed overview of steps involved in making a decision about releasing equity from your property.
If you are thinking of using equity release to pay for care, read our blog.