“My home is my pension” is a common refrain these days. But, if the need arises, which are your best options to turn that asset into cash?
There are millions of people in the UK described as being “asset rich and cash poor”. And many, having put their efforts into repaying their mortgage over their lifetime, are now looking to a way to tap into that resource to help fund their later years.
Even for those who are comfortably off, there can be arguments to make the most of the available capital to adapt their home, fund an operation or assist younger members of the family.
By far the most popular method is to downsize: maybe within the same locality in order to retain one’s social network. My parents built a bungalow in their back garden and sold the house to pay for it. Now that is staying local!
Equally, others look to move closer to their family, to a purpose-designed retirement development or even to a warmer climate.
And this is exactly what the government wants us to do – hence all the talk about incentives to encourage seniors to downsize. It helps to get them off the hook of providing hundreds of thousands of family homes to meet the chronic shortage across the country. The theory goes that if pensioners trade in their three or four bedroom house for a one or two bedroom apartment, younger families can move in (if they can afford it) and the use of the country’s housing stock is optimized.
The logic is impeccable…
But what the government wants doesn’t necessarily work for us. It might, but for lots of reasons, it might not. Not least is the fact that the housing shortage means that there is not enough choice out there of suitably designed homes where older people can “age in place”. You might have to move a long way from your current abode – and so away from the friends, relatives and neighbours that play a large part in your lives.
WHY SHOULD I DOWNSIZE?
There are many plusses for downsizing. The house is still “yours” – very important psychologically to many. You retain an asset (albeit a reduced one) which the children can inherit. And you can elect to move to a less expensive area where your money will buy you the garden you’ve dreamt of or a spare bedroom for when children and friends visit.
The downsides (pun intentional) of downsizing could be seen as the costs – legal and agents fees, stamp duty, moving costs and maybe redecorating costs at the new home all eat it into the funds released to pay for the next home. Of, course if sheltered accommodation, with care resources on hand, is the next step, then there is not much choice.
So is there a way to release funds from our home that doesn’t involve using the services of a removal company?
Well, yes there is: the Lifetime Mortgage does not require us to move but does release a slice of the capital. Previously universally called “Equity Release” and the cause of much suspicion, the Lifetime Mortgage (or the much less popular “Home Reversion”) has now become more mainstream, more sophisticated, and with much more flexibility.
WHY SHOULD I TAKE OUT A LIFETIME MORTGAGE?
The advantages are that there is no need to move; the upfront costs are generally much lower; and, although you have a mortgage, you don’t have to pay interest or capital repayments during your lifetime (although you can opt to pay all or some interest in order to preserve the children’s inheritance).
It is entirely possible that there will still be equity to leave in your will since the Lifetime Mortgage provider will be conservative in the sum they lend to make sure that they are fully covered by the future value of the home. That said, how much will be left is not an exact science: as Einstein said “Compound interest is the eight wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”
A simple Excel calculation will amply demonstrate how the debt can grow, but equally if the value of the house rises on the same principle it offsets at least some of the effect.
Disadvantages, other than the dwindling equity, include a reduced ability to freely move later – you may have less capital to play with. Interest rates are also higher than regular mortgages – effectively you are getting a fixed rate mortgage for your lifetime, which avoids the potential for an unexpected hike in interest rates but the lender will build in a margin to hedge against this.
One other drawback is that, in some cases, early repayment can result in penalties. A boost to your bank balance can also impact on benefits if these play a key role in your finances.
HOW DO I CHOOSE BETWEEN DOWNSIZING AND A LIFETIME MORTGAGE?
As with all these things, it pays handsomely to do your research very thoroughly – and take independent advice before what will be a very major decision. In the end it comes down to personal circumstances and preferences. There is no general right or wrong way for everyone, but for each individual one or the other will be right for them.
One of the challenges is working out the detailed impact that these options would have on the amount of money you can comfortably spend each year for the rest of your life. The good news is that you don’t need to be a maths whizz to do those calculations – just a subscriber to the RetireEasy LifePlan Premium.
Using the Premium model allows you to compare the different results – and then save these alternative scenarios to consider at leisure or share with other members of your family. For only £3.99 per month you can remove the uncertainty and gain peace of mind, and you can return at anytime to check or update your LifePlan as circumstances change. Go to RetireEasy Premium to register. Or, if you are already a Basic or Classic LifePlan user, go to Upgrade My Account.
Important: It is wise to take advice on either option, but particularly before taking out a Lifetime Mortgage. They are nothing if not complex!
