In March the Equity Release Council issued their 2022 Later Life Lending report. The report highlights that in the UK, property wealth has reached £6.7trillion and £5.2trillion after mortgage debt. A significant portion of this wealth is in the hands of the over 55s. For some, the equity in their home could far exceed the value of their pension/investment savings and therefore have a significant impact on the quality of their retirement.
How can the family home help finance retirement and the younger generation?
As life expectancy continues to grow and inflation impacts the quality of life, financial planning for and during retirement becomes critical. For the younger generation who are struggling to get on the property ladder or move up to a larger property, an early inheritance may be more beneficial. For many the family home is a significant asset which should not be ignored as it can be used to generate positive cash flow to facilitate appropriate financial planning. What options are available?
- Downsizing – selling the family home and moving to a much lower valued property to release cash which can be gifted and/or used to meet every day living costs. Many are reluctant to move out of the familiar surroundings especially if family and friends live nearby;
- Rent-a-room – earn rental income from letting out a spare room in the family home. However, this is unlikely to generate immediate cash for gifting. The thought of living with a stranger may not appeal to everyone;
- Lifetime mortgage – can generate regular cashflow for daily expenses and/or lump sum for gifting to children/grandchildren during lifetime.
What is a Lifetime Mortgage?
A ‘lifetime mortgage’ is a loan secured against a borrower’s home. The borrower retains full legal ownership of the property and usually there are no monthly repayments to make as the loan (plus rolled-up interest) is repaid when the borrower passes away or goes into long-term care.
Unlike normal mortgages, a ‘lifetime mortgage’ does not have a fixed end date. Borrowers also have the option to pay part of or all of the monthly interest. For those in a partnership, the mortgage (along with rolled-up interest) is not repaid until the last remaining person living in the home either dies or moves into care, thus borrowers are free to live in your home for the rest of their lives.
How can a lifetime mortgage help?
The amount of mortgage a borrower will be eligible for will depend on facts such as their age (minimum age of 55), health, value of their home and any existing outstanding mortgage.
Lifetime mortgages offer the flexibility of either a full drawdown or regular lump sums. Therefore, borrowers have the flexibility to undertake key financial planning decisions such as:
- Delay accessing their pension (tax free lump sum or regular income withdrawals):
- Pension remains invested for longer, hence can last longer into retirement;
- Limits exposure to income tax on pension income.
- Delay accessing savings such as ISAs;
- Cash gift during lifetime rather than only on death, thereby allowing parents/grandparents to ‘experience’ the benefits of lifetime inheritance;
- Introduce financial flexibility to facilitate inter-generational inheritance tax efficient wealth planning/transfer.
Lifetime Mortgages are applicable for over 55s, may affect state means-tested benefits and could affect the inheritance you may leave.
Next Steps
If you are providing advice to clients on retirement planning/ family finances or wish to discuss your personal circumstances, contact one of the team at +44 (0)20 3871 2823 or email at [email protected].