From wanting to subsidize pensions to maintain a comfortable standard of living, to taking dream holidays, and/or raising cash to help family members in times of crisis; more and more people over the age of 55 are using wealth tied into the property they own to finance their life choices.
Most lenders now offer options such as Retirement Mortgages, Lifetime Mortgages, Drawdown Lifetime Mortgages, Pensioner Mortgages and Home Reversion Plans. They are aimed at people who want to raise cash from the equity in property without moving home but as people are living longer and/or taking retirement younger, they can all be very expensive options.
An alternative option that can be far cheaper and one that uses the wealth tied in a property rather than borrowing against it (as the options above do) is to downsize.
Here we look at the advantages and disadvantages of equity release compared to downsizing.
What Are Retirement Mortgages, Lifetime Mortgages, Drawdown Lifetime Mortgages, Pensioner Mortgages and Home Reversion Plans ?
They are all forms of ‘equity release’ – i.e. they are all ways that people can raise money against the value of their home without moving out.
Retirement Mortgages, Lifetime Mortgages, Drawdown Lifetime Mortgages, Pensioner Mortgages are all loans secured by the property and will incur interest charges which are repayable monthly or added to the debt until the loan is repaid by the lender or their families or the property is sold.
Home Reversion Plans are shared ownership schemes and are ended when the property share is bought back or the property is sold.
Money raised from equity release plans is paid back within 12 months of when: the home owners dies or moves into care; or if the property is repossessed – e.g. if interest payments fall into arrears. Normally the money is repaid from the sale of the property but relatives can repay the money and keep the property if preferred.
As well as interest charged on all loans (normally 5%), most plans incur arrangement or setup costs plus other charges such as legal and valuation fees, buildings insurance, and advice fees normally ranging from £1,500 – £3000.
The maximum amount of money that can be borrowed against the value of a property is normally 60% of the property value to insure there are sufficient funds from the sale of the property to repay the debt and any added costs or interest during the lifetime of the loan however age, life expectancy and property value will affect the maximum amount available.
|Type of Equity Release plan||How it works|
|Sometimes referred to as ‘Roll Up’ mortgages, these are similar to ‘lump sum’ secured loans, secured against the value of your property. The rate of interest charged on the loan is agreed when the loan is take out and the final amount is calculated when the property is sold. It is added to the debt and paid back with the loan when the property is sold.
Interest Only Lifetime Mortgage
|Just like a normal Lifetime Mortgage, you get a lump sum of tax-free cash and continue to own your home. However, with an Interest Only Lifetime Mortgage you can pay back some of the interest. If you pay back all the interest, the amount you owe will never go up.
Drawdown Lifetime Mortgage
|Just like a Lifetime Mortgage, you get tax-free cash as a loan that’s secured against your property. However, with this type of plan you have more flexibility. You can take the money as and when you like instead of in one big lump sum, like a pension pot.
Home Reversion Plan
|With a Home Reversion Plan, you sell all or part of your property to release money from it as a lump payment, a regular income or both.
You can stay in your home as a tenant without paying rent (or interest as it is not a loan) until the agreement is ended (the share is bought back at full market value rates or the property is sold) though you may be liable for annual ground rent and companies typically only pay between 20% and 60% of the market value of the share, depending on your age and state of health (generally, the longer the time until the agreement is ended, the lower the value given).
Equity release is considered an expensive way to borrow money and- especially where interest is allowed to grow the debt. As a rough rule of thumb, the debt doubles roughly every 14 years so if a person borrows £20,000 aged 60 at 5.1% and lives to be 88, the amount to be repaid could total £80,000.
Most reputable providers offer a “no negative equity guarantee”, which means what customers owe can never exceed the value of their property but this may incur more charges added to the equity release. If this is not bought, where the money to be repaid is greater than the value of the property, any shortfall must be repaid by the customer or their families.
What Is Downsizing?
Downsizing is a way to convert material wealth into cash without lending or selling a property below market value by selling the property and buying a cheaper option. It is also known as ‘rightsizing‘ – especially when children have left home and family needs or aspirations have changed.
Moving can be a difficult decision to make due to the memories homes hold and the work put into tailoring a house into a home – especially if the property is affordable and manageable but the longer you leave it, the more difficult it gets and downsizing (or rightsizing as we prefer to call it) isn’t always a matter of choice.
Most people adapt better to a downsizing or rightsizing if the decision is a matter of choice, made in good health with enough time and energy to enjoy the wealth released from the move to a smaller property or cheaper area. To make the most of retirement and settle into a new home, it makes sense to rightsize before there are any mobility issues. Some key life events that trigger downsizing or rightsizing are children leaving home or reaching retirement age. We think the best age to downsize or resize is between 55 – 65.
Downsizing provides people with the added opportunities and motivation to de-clutter, and/or prepare their environment for older age and/or choose low maintenance options and/or move to a different area. Cash raised from downsizing can be spent, saved, re-invested or given to friends and family as an inheritance tax free gift (if you live for more than 7 years after the gift is given).
The best time and reasons to downsize or rightsize is when one or more of these statements is relevant:
- Your house bigger than you need and you’re unlikely to make use of the spare space
- Your house and/or gardens will be difficult to maintain in older life and you want to plan ahead
- You want to live closer to family and/or friends or in a retirement community
- You live in a house or flat with accessibility issues that could be isolating in later life
- You’d like to reduce your living costs (heating, council tax, insurance etc)
- You want to give another family the chance to love and care for your home as much you do/did
- You don’t want to beloved home to fall into disrepair
- You would rather spend or gift the wealth you have tied into your home than pay inheritance tax
- You want to raise savings to supplement your retirement income
- You’ve worked hard all your life and now you want to play hard
- You want to leave your family something to inherit when you die
- You would rather move when you are fit and healthy than when you NEED to move
Alternative Options to Equity Release or Downsizing
Some alternatives way to raise money from your home without lending money against it or downsizing are:
- renting a room to a lodger
- move out of the property you own so you can rent it to others while you rent a smaller property (or travel)
- sell your property to buy a similar sized property in a cheaper area (perhaps close to friends or family)
- sell your property to raise funds to build a granny annex
How To Make A Decision
Only YOU can make the decision to move and we would NEVER try to persuade anyone to sell their home (this article is intended to ensure people who are considering equity release are well informed of other options and of the potential cost of Lifetime Mortgages) but these are some of the things we know are commonly considered:
- Consider your age, your life expectancy and how much money you would like to raise to compare the cost of a long term loan to a one off cost of moving.
- Consider your practical needs for the future.
- Consider your emotional needs and priorities.
- Consider your will.
If you want to raise more than £10,000 and expect to live more than 15 years after the cash is released, moving house will most likely be a far cheaper option.
If you cannot bear to move, equity release might be the best option (if cost is not an issue and health/mobility permitting).
If you want to enjoy some of the wealth you have built up over your lifetime but also want to set aside some money or assets for your children, you will have more control over your spending by downsizing or rightsizing.
When To Make A Decision
Plan ahead. Do NOT wait until you are forced into a decision.
The demand for bungalows usually outstrips the supply so they are normally snapped up very quickly. If you have found a dream bungalow, find out how we can help you sell your property fast or even buy your property directly so that you can be confident of making an offer and having funds in the bank to pay.