Best way to spend the house?

Loughton_Monkey

My main questions are about Lifetime Mortgages. But first some background.

I am 61, married, no children, early retired, and living in a mortgage-free house. Our spending is funded roughly 50% by some pensions, and the balance by savings and interest. More pensions switch in later. My detailed projections show that when we take all of our pensions, they will fund approximately 75% if spending.

This would mean running out of cash at about age 72, but we don't want to drop our spending by 25%. Therefore, we will need to "spend the house" at some stage.

My strategy is to downsize - say just before age 70. This, I reckon, would finance us up to about age 90, based upon releasing about 40% of the equity.

My 'problem' (if that's what it is) consists of the value of the smaller house, which (for the purposes of discussion) might still be worth about £500K in today's terms, and so this is a significant sum to leave 'unspent' when we die.

Therefore, I am thinking of a strategy that also has me taking a Lifetime Mortgage the minute we downsize. Now I have only sketchy knowledge of how these things work, and making enquiries with relevant providers seems to result in an unacceptable degree of intrusion and salesmanship, which I want to avoid, since I am not in the market for quite a few years. But I just want to know roughly what I could achieve.

We have considered a Lifetime Mortgage on the current house, but reject it on the basis that it will become too large/expensive for us much after the age of 70 so we want to downsize anyway. Although selling up completely and renting would maximise our spending capability, we would not (at the age of 70+) want to be living in rented accommodation - or, say, a mobile home.

So here are my questions:

1. Would it be reasonable to assume that I could borrow about 30% of house value at age 70, and be 'charged' about 6.5% interest? [Based upon drawing down the 30% evenly over a number of years]. Obviously no-one can predict what interest rates might be 10 years from now, but my model needs to make a working assumption as of now.

2. On the assumption we were still alive at age 80, by which time the house value might have gone up considerably, and mortgage balance may not have reached the full amount agreed at age 70, is it likely that the lender would happily 'reassess' the situation, and allow a larger mortgage percentage on the revised house value at that time?

3. Is there an alternative scheme (other than Lifetime mortgage) that anyone could suggest for, say, a 70 year old couple in a £500K house, that would optimise the amount of extra cash available to live on? As stated, the value of our estate is of no particular importance to us. We can't avoid leaving something, but we want it to be as small as we can reasonably make it.

beecher2

Is selling up and renting an option at some point? That would free up all your cash.

Loughton_Monkey

Loughton_Monkey wrote: »

Although selling up completely and renting would maximise our spending capability, we would not (at the age of 70+) want to be living in rented accommodation - or, say, a mobile home.

I covered this above. We don't want to consider renting.

TrickyDicky101

A home reversion plan would, alternatively, see you selling an equity stake in your property which becomes payable when you either sell the house or die. You can continue to live in it rent free and are responsible for maintenance.

[Deleted User]

Don't know anything about this myself, but what looks like a useful article on the subject can be found at unbiased.co.uk. Link below if it appears correctly). Can't confirm it's accuracy though. Seems to cover most of the options you mentioned.

http://www.unbiased.co.uk/find-an-independent-financial-adviser/personal-finance/mortgages/equity-release-unlocking-money-from-your-home/

Loughton_Monkey

TrickyDicky101 wrote: »

A home reversion plan would, alternatively, see you selling an equity stake in your property which becomes payable when you either sell the house or die. You can continue to live in it rent free and are responsible for maintenance.

Thanks.

What is the maximum percentage of equity that you can normally sell? Could we go as high as, say, 90%? Presumably the 'cost' (to me) of this is a degree of undervaluation of the house? Any set-up costs other than modest valuation fees?

If, say, I had bought it (cash) for £500K the previous month, presumably they would value it at £450K best, and then grab 50% of value when finally sold.

[Deleted User]

From the article I posted, it looks like you can only get around 50% of the value of the house even if you sell the whole thing. Presumably as the company may need to wait 20 years to get anything back, with no firm knowledge of the selling value at that point. Plus having to pay interest themselves on the money they borrowed to give to you.

None of the concepts would be recommended as a decent investment strategy, but obviously with no children and not having to worry about residual value of the estate, it's a completely different game.

Loughton_Monkey

Deleted_User wrote: »

From the article I posted, it looks like you can only get around 50% of the value of the house even if you sell the whole thing.

Yes, that's the confusing thing in this otherwise useful link. It says quite clearly if you sell 50%, then the company takes 50% when you die. But it also says if you sell 100%, your estate would probably only get 50/60% of true market value.

The only assumption that would be consistent with this is that they undervalue the house by up to 50%! Can this be right?

Does anybody know any ball-park figure of the degree to which they might discount, for, say, a 70 year old?

[Deleted User]

Loughton_Monkey wrote: »

The only assumption that would be consistent with this is that they undervalue the house by up to 50%! Can this be right?

I think that's exactly what happens. If you sell them half of a 500k house, they'll give you 125k. Then when the house is sold, let's say for 500k still, they get 250k and your estate gets 250k.

If you sell them the whole thing, they give you 250k and get the full sale value of the house.

It looks like 60% of value is the most you get, even if you're on your last legs, so we'll need to assume you'll have to be 75 or more to get that. So a 70 year old might get 55%, and less than 50% if you're in your 60s.

Loughton_Monkey

Thanks.

That sounds a bit of a rip-off to me. I'll do some calculations on this basis, but looks to me as if Lifetime Mortgage is far more 'honest' and straightforward, because even if they undervalue the house, it just reduces the amount you can get out, but doesn't affect the financial dynamics of the arrangement.

TrickyDicky101

With the reversion plan the reversion provider is effectively taking a bet on how long you (& your wife) will live for - ie the shorter your lifespans then the higher the profit. With the lifetime mortgage this isn't so critical as the loan will increase due to compound interest (capped at the value of your property). Reversions could well be preferable if you had dependants you wanted to leave something to but because this isn't the case with you, I think you are probably correct to focus on lifetime mortgages.