Q: I am a fit 77-year-old and my wife is 72. We have a house which is worth about £325,000. We also have around £70,000 in premium bonds and shares.
So at the moment, my estate would attract inheritance tax.
We travel a lot with our caravan both in the UK and on the continent. We’re also planning another holiday in Cyprus and hope to get to New Zealand next year. All this eats into our savings, as we do not have any income apart from the state pension.
I would like to continue our lifestyle and we are considering raising cash from our house some time in the future, but I know that equity release has its downsides such as high accumulating interest rates. I’ve read, for example, that a loan of £40,000 could increase to £80,000 in 10 years’ time.
I am, however, totally confused about what action I should take to ensure that we can carry on doing lots of travelling until age catches up with us both. There must be hundreds of others who are in our position. Are there any standard recommendations we should consider? TB
A: Before going anywhere near an equity release scheme, the general rule is to consider all the alternatives first. In your case, rather than getting cash out of your property, it might make more sense to fund your travels by using up your existing savings and investments in the form of your shares and premium bonds. Only once those reserves have got down to a level which gives you a modest cushion against emergencies should you look into raising cash from your home.
When you do get to the stage where you need your home to provide you with cash, you might want to give serious consideration to downsizing. Raising cash from your current home by moving to a smaller and/or cheaper property is largely considered a better option than the other two ways available.
If downsizing is not an option, the main way that people raise cash from their homes is by taking out a lifetime mortgage. With this type of borrowing you get a cash lump sum, but don’t have to make interest payments. Instead, the interest charged is added to the amount you initially borrowed and not repaid until the home is sold. But you are right, rolling up the interest in this way rapidly increases the size of a loan. If you borrowed £60,000 with an interest rate of 5.13%, after five years you would owe around £77,500, after 10 years just over £100,000 and after 20 more like £167,000.
You can keep interest costs down by going for a flexible lifetime mortgage, where instead of taking a large lump sum all in one go, you borrow smaller amounts gradually as and when you need them to pay for your holidays. Assuming the same interest rate as before, taking £60,000 in smaller lumps over five years could cut the interest bill by around £20,000 over a 10-year period.
The alternative to a lifetime mortgage is the home reversion plan, where you sell all or a part of your home for cash while retaining the right to live in the property until you die or move into a care home. This doesn’t involve an interest charge, but the major downside is that you sell a large part in exchange for a much lower price than market value to make up for the fact that you will be living in the property rent-free. At the minimum age of 65 that you can usually access this type of plan you would get 20% of the market value of your home in exchange for surrendering 70% of its value - although the older you are, the more you get.
One possible advantage of both types of equity release is that they will reduce the size of your estate for inheritance tax purposes, but will also reduce the amount of money available for the beneficiaries of your will.
You can compare equity release schemes for free at the charity-operated Stepchange Financial Solutions, but expect to pay between £500 and £2,000 for setting one up.
