Contemplating equity release

hansi

I am mortgage-free, have moderate savings, state and private pensions, no dependents, and am contemplating equity release to fund future holidays. Is this the best way to go or should I be looking at other options?

Loughton_Monkey

Mainly depends upon how old you are.

hansi

I'm 67, will be 68 this year.

Loughton_Monkey

If you have no desire to 'leave' money, then some form of equity release can make sense.

Someone like Saga can explain all the different methods in a reasonably 'professional' way, but they would send round the 'hard sell'.

I am no expert, but am aware of two (I think the most popular) methods. But firstly, I would suggest that in certain circumstances, moving house (downsizing) is probably the most 'efficient' method. This, of course, comes with obvious consequences, and is not always possible if your house is already as 'minimal' as you would like. But if you are in a large, 3 bed and would be happy in a smaller 1-bed maisonette with little/no garden etc. then moving can 'do the job' quite well.

Failing that, one form of equity release basically involves a company 'buying' a share of your house. You get the cash and can now live in the house rent free for the rest of your life. But as you might expect, they are no philanthropists. If your house was worth, say, £200K on the open market, they would 'value' it at probably a bit less than half of that. So (I'm guessing) they may give you £80K and buy 100% of the house. Sounds bad, but they are allowing you to stay rent free forever.

The second method, and one I favour personally, is the 'Lifetime Mortgage'. Put simply, it takes the form of a new mortgage on the house, at 'not particularly competitive' interest rates, in which they simply do not expect you to 'pay' any interest. The interest simply rolls up in your mortgage account and will be repaid upon death and subsequent sale of the house. The amount you can borrow depends on your age. At age 70, it might be around the 25%/30% mark. And usually, you set it up as 'drawdown' so that you don't get the full amount (or pay interest on the whole amount). You just 'dip in' to the mortgage account as and when you want cash. Then the interest starts charging up.

If you work some figures out, you can see why you will only get about 30% out of it. Your £60K rolling up at, say, 7% interest over another 20 25 years can come to a hefty sum - and will eventually approach the house value.

The reason I prefer Equity release is:

1. You die 6 months after taking out the scheme, with Equity release your estate has lost pretty much nothing. Only what you've spent. Under part ownership, your estate is £60K/£80K cash. That's all.

2. If house prices go up, part ownership means 'they' are enjoying the profits. You are not. However, under Lifetime Mortgage, house price increases are wonderful and 'all yours'. If it goes well, and you are still 'hitting the highspots' at age 80, you could 're-mortgage' on the basis of higher values, higher age, and porbably get a bit more.

3. Equity release is very simple, transparent, and sensible. You are retaining full use of your 'pile of bricks', and basically someone else is simply saying to you "Look. Here's some money. Go and enjoy yourself. I will 'charge' you a healthy 7% interest, but simply add it to your account. Don't bother about repaying me. I'll wait until you die and get all my money and interest back from your estate."

hansi

Loughton_Monkey wrote: »

If you have no desire to 'leave' money, then some form of equity release can make sense.

Someone like Saga can explain all the different methods in a reasonably 'professional' way, but they would send round the 'hard sell'.

I am no expert, but am aware of two (I think the most popular) methods. But firstly, I would suggest that in certain circumstances, moving house (downsizing) is probably the most 'efficient' method. This, of course, comes with obvious consequences, and is not always possible if your house is already as 'minimal' as you would like. But if you are in a large, 3 bed and would be happy in a smaller 1-bed maisonette with little/no garden etc. then moving can 'do the job' quite well.

Failing that, one form of equity release basically involves a company 'buying' a share of your house. You get the cash and can now live in the house rent free for the rest of your life. But as you might expect, they are no philanthropists. If your house was worth, say, £200K on the open market, they would 'value' it at probably a bit less than half of that. So (I'm guessing) they may give you £80K and buy 100% of the house. Sounds bad, but they are allowing you to stay rent free forever.

The second method, and one I favour personally, is the 'Lifetime Mortgage'. Put simply, it takes the form of a new mortgage on the house, at 'not particularly competitive' interest rates, in which they simply do not expect you to 'pay' any interest. The interest simply rolls up in your mortgage account and will be repaid upon death and subsequent sale of the house. The amount you can borrow depends on your age. At age 70, it might be around the 25%/30% mark. And usually, you set it up as 'drawdown' so that you don't get the full amount (or pay interest on the whole amount). You just 'dip in' to the mortgage account as and when you want cash. Then the interest starts charging up.

If you work some figures out, you can see why you will only get about 30% out of it. Your £60K rolling up at, say, 7% interest over another 20 25 years can come to a hefty sum - and will eventually approach the house value.

The reason I prefer Equity release is:

1. You die 6 months after taking out the scheme, with Equity release your estate has lost pretty much nothing. Only what you've spent. Under part ownership, your estate is £60K/£80K cash. That's all.

2. If house prices go up, part ownership means 'they' are enjoying the profits. You are not. However, under Lifetime Mortgage, house price increases are wonderful and 'all yours'. If it goes well, and you are still 'hitting the highspots' at age 80, you could 're-mortgage' on the basis of higher values, higher age, and porbably get a bit more.

3. Equity release is very simple, transparent, and sensible. You are retaining full use of your 'pile of bricks', and basically someone else is simply saying to you "Look. Here's some money. Go and enjoy yourself. I will 'charge' you a healthy 7% interest, but simply add it to your account. Don't bother about repaying me. I'll wait until you die and get all my money and interest back from your estate."

Thanks, I'll give it some thought. Would an IFA be the first port of call?

hansi

Thanks for that. On something entirely different, is anyone having problems with receiving the emails in conjunction with these posts. I have had two tonight and they are totally blank!

Loughton_Monkey

kathleenryd wrote: »

It is all very well saying downsizing is the best option.

I did not say "downsizing is the best option. I said:

But firstly, I would suggest that in certain circumstances, moving house (downsizing) is probably the most 'efficient' method. This, of course, comes with obvious consequences, and is not always possible if your house is already as 'minimal' as you would like. But if you are in a large, 3 bed and would be happy in a smaller 1-bed maisonette with little/no garden etc. then moving can 'do the job' quite well.

kathleenryd wrote: »

PM me if you wish to chat about it.

Mrkathleenryd

So for how long has it been OK to use these forums to solicit FSA regulated business?

SnowMan

Some good information on equity release and other alternative options including a downloadable factsheet is on the Age UK website

http://www.ageuk.org.uk/money-matters/income-and-tax/equity-release/

Annisele

My own view (reached with all my own biases) is that equity release should be an absolute last resort. That doesn't mean I think it should never be used - for some people it can be fantastic - but I do think that all other options should be considered first.

So, for example, if you were 67 with a £150k house and £150k in savings I'd suggest you probably don't want to touch equity release - at least not yet.

If you were 67 with a £1mil house and £2k of savings, my feeling is that equity release would be a potential option - but not necessarily the best one.

You could also try SHIP as a source of information, but bear in mind that equity release is the reason for their existence so there may be some biases in its view

Loughton_Monkey

Annisele wrote: »

So, for example, if you were 67 with a £150k house and £150k in savings I'd suggest you probably don't want to touch equity release - at least not yet.

If you were 67 with a £1mil house and £2k of savings, my feeling is that equity release would be a potential option - but not necessarily the best one.

Would tend to endorse that.

I personally have 'pencilled in' a downsize at roughly age 70, because that fully meets my needs. Then a Lifetime Mortgage on the 'smaller' house remains as a sort of 'contingency plan' for use later if necessary/desirable.

One thing to remember is that once done, it's done. If a 'greater' need came up later and it has all been spent, there is little freedom/opportunity left.

Always something to enter with eyes fully open.

hansi

Loughton_Monkey wrote: »

I did not say "downsizing is the best option. I said:





So for how long has it been OK to use these forums to solicit FSA regulated business?

The thought had crossed my mind too;)