Author: , CertPFS, CertCII(MP), CeRGI, CeLTM, CeRER
Last updated: August 3rd, 2022
Equity release may be an attractive financial proposition for many homeowners who wish to tap into the value of their property without having to move out. But before you sign on the dotted line to raise cash in your later years through equity release, please make sure you consider this huge financial decision within the context of your family. Decisions taken by you now will have an impact on your immediate family, which is why it is so important to involve your loved ones in the process.
What is a lifetime mortgage?
The most popular type of equity release plan is a lifetime mortgage. It is different to a regular mortgage in several respects, as is explained in a recent blog post here, and you need to be aged 55+ to be eligible.
As the name suggests, this is a mortgage that is redeemed at the end of your life (or when you move into long-term care). The loan is secured on your main residence while you retain ownership and carry on living there.
You have the option of ringfencing some of the value of the property as an inheritance for your family, and you can also choose to make regular repayments on the mortgage, or simply let the interest roll up. When you pass away, the loan and any accrued interest is redeemed. Since a lifetime mortgage affects the value of your estate after your death, it means there will be less to leave to your loved ones.
Why your family may have concerns
It is perfectly reasonable for your family to be sceptical of equity release. After all, they only want what’s best for you and you can’t blame them for wanting to protect you from being taken advantage of. It is also the case that equity release had a dubious reputation back in the 1980s which, thankfully, has now been put to rest. It is now a reputable financial strategy for older people with a property asset.
Importantly, the Equity Release Council was established in 1991 as the industry body for the UK equity release sector, and its members abide by Council rules. It “exists to promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart.” (Equity Release Council).
Another valid concern that your relatives may have is that taking out a lifetime mortgage will reduce the amount of their inheritance they would otherwise receive, since the mortgage is repaid through the proceeds of the sale of your property. However, you could use your tax-free lump sum obtained through equity release to help your family financially while you are still very much alive. Whether you gift a lump sum, help to pay the school fees or to get on the property ladder, they may not be missing out after all.
Explain your reasons for considering equity release
If you believe that a lifetime mortgage is the right choice for you, your family should know your reasons. Honesty and transparency are always the best policy, especially within the family. What are you hoping to achieve by releasing some of the equity tied up in your home? Are you looking to boost your retirement income or to go on a holiday of a lifetime? Perhaps you would like to pay off your existing mortgage, invest in a new kitchen or other home improvements? There is no reason why you should not use your wealth to make your retirement more comfortable.
Other motivations might be to pass a lump sum onto your family by way of a ‘living inheritance’, helping out financially when they need it most. From going to university to getting married and buying a first home – these are all expensive undertakings that parents and grandparents may wish to support. Talk to your family about their immediate needs and decide together on how you can best make a financial contribution.
What are the benefits of equity release?
It is unlikely that other members of your family will have done as much research into equity release as you have, which makes it your job in explaining to them the advantages of taking out a lifetime mortgage. These include
- Receiving a tax-free lump sum to enable you to lead a comfortable life in your old age
- Obtaining capital to help out family members financially and/or to spend on home improvements
- The ability to carry on living in your home until you go into long-term care or pass away
- Fixed interest rates, so you know exactly where you are financially without having to worry about market fluctuations
- The option to make monthly repayments in order to reduce the final loan repayment due after your death
- A ‘no negative equity’ guarantee which means you will never owe more than your house will sell for.
As with any financial decision, it is prudent to weigh up the pros and cons before making a commitment. Equity release is not the right choice for everyone, so it is important to show your family that you have thought long and hard about lifetime mortgages before reaching a positive conclusion.
Potential downsides to discuss may include:
Would you be able to move home with a lifetime mortgage? (The answer is yes, you can.)
How does equity release affect your inheritance? (It enables you to share your wealth while you’re alive.)
Will taking a tax-free lump sum affect your other benefits? (You could draw down in instalments instead.)
Speak to an equity release specialist together
Taking out a lifetime mortgage is a big step. Not only does it need to be the right decision for everyone concerned, but you need solid expert advice from an experienced equity release specialist. I have been working in financial services for well over 20 years, and as a specialist equity release broker I am a proud member of the Equity Release Council.
Based on my deep insight into the marketplace, I can help you choose the best lifetime mortgage for your needs. Including your family members in your equity release decision is the best way to ensure that your requirements are met perfectly. Please feel free to get in touch to ask any questions you or your family may have and ask for a personalised illustration.