Why lifetime mortgages can make sense for over 55’s

Unlocking house wealth through equity release; why lifetime mortgages make sense for over 55’s

In the last tax year 2015/16 equity release mortgage applications, (which are now know as lifetime mortgages) hit a new annual record in total lending. Lifetime mortgages are used by some over 55’s to unlock house wealth. Over 22,500 mortgage deals were arranged, hitting a new record high of £1.61billion in lending. The figures released by the Equity Release Council (ERC) also show that total lending of £898million on lifetime mortgages, was made in the final half of 2015, the largest half yearly total on record.

So why the increase in lifetime mortgage applications

1. There is a need for some retired people to supplement their pension income due to low annuity rates. By releasing equity in a property, pension income can be supplemented through pre-planned staged payments, or drawdowns via a lifetime mortgage product.
2. In other cases house wealth can fund domiciliary care in the home. More people in need of care are now choosing to stay in their home, rather than selling their house and and moving into a care home.
3. House equity can be used for home improvements. Homeowners in later life do not always have the means to carry out extensive repairs to their home. This is because they may not have the capital as a lump sum, or they may not have sufficient income to secure a loan. By using equity released from their homes they can afford home improvements.
4. Some later life homeowners use equity release to provide a Living Inheritance. By placing a debt on the house and gifting the money to their children later life homeowners enable their children to receive part of their inheritance early. And subject to UK Inheritance Tax (IHT) regulations, can potentially reduce IHT liability for both the estate and offspring.

The majority of drawdown plans, around 7 in 10, that were agreed in the last quarter were options plans; meaning that clients could elect to withdraw housing wealth in stages to boost retirement income as, and when required. Options drawdown lending for the whole year stood at £961 million the highest ever in a whole year.

ERC member firms contribute over 90% of the UK’s total lifetime mortgage lending which reached a record figure of £1.61billion in 2015. Whereas the lifetime lending figure in 2014 was £1.38billion.

Both the high value of equity release agreements and increased number and drawdown plans available indicate an emerging trend as over 55’s increasingly look to supplement retirement income including pensions.

Maybe over 55’s are releasing capital in their homes to simply give them more financial freedom in their retirement; and who could blame them!

Perhaps it’s the reduction in interest rates and offer of benefits such as free valuations and cashbacks that accompany these plans which have contributed towards their popularity.

However, if we take a closer look at inheritance tax and probate fees we can see that rising house wealth is driving changes in legislation…

…the introduction of:

1. Higher probate fees for properties valued at over £2million – now £20,000, formerly £215 and
2. Significant increase in Inheritance Tax payments – up 21% from £3.8billion (tax year 2014/15) to £4.6 billion (tax year 2015/16)

Demonstrate that growing numbers of over 55’s are planning for higher housing value and protecting their nest and its eggs through inheritance tax planning, and investment products such as Investment Savings Accounts (ISAs) and Enterprise Investments Schemes (EISs).

For equity release, retirement income and inheritance tax planning, ISA and EIS investment and pension advice contact Marchwood IFA today.

There are many different equity release schemes available on the market. We would advise you to seek professional financial advice before deciding that equity release is right for you. Please obtain specialist independent financial advice including an illustration. Equity release may not be suitable for you.