Research by the Money Advice Trust reveals that a third of Britons (16.9 million) borrowed money to pay for presents for Christmas and a fifth (10.4 million) of us borrowed to put food on the Christmas table. One solution some people turn to to pay off debt is equity release.
These so called “lifetime mortgages” work like this. If you are over the age of 55 you can access the cash tied up in your home by borrowing against it. You do not have to make monthly repayments as the funds are only repaid when you die or move into long-term care. The interest, however, accrues in the background and this can make equity release expensive.
It is not uncommon for the interest rate to be compounded and fixed for the whole term of the loan. I have seen an original loan of £20,000 with interest fixed at 9% balloon to over £70,000 on the death of the policyholder 15 years later, with interest continuing on a daily basis after death until the property is sold.
The interest rates are high because the providers do not make any return on their loan until you die, or move into long-term care, and the property is sold.
Most equity release products will have “a no negative equity guarantee” – meaning that the people who inherit the property on the policyholder’s death will never be left with a debt from the sale of the property. But this is seldom the case because there are restrictions on how much you can borrow, for example, a 55 year old can only borrow up to 26 percent of the value of their property.
With people living longer and needing more money to support themselves it is easy to see why they have turned to equity release. Especially if they do not want to downsize and move out of the family home and away from family and friends. However I would encourage them to look at other options first and to always discuss their situation with their family or intended beneficiaries. It is never easy to break it to family members that their parent had taken out an equity release product and thus, the estate they expected to inherit on death has been largely wiped out.
It is important to take financial advice before taking out an equity release product as it can affect any means tested benefits you may receive such as pension credit, jobseeker’s allowance, income support, universal credit and council tax support.
It can also affect your inheritance tax situation. The loan and any accrued interest up to death will be treated as a liability of your estate and therefore reduce the value of your estate for inheritance tax purposes. In some cases this can be used for estate planning and the making of lifetime gifts but, that said, most people who need to release cash from their home do not have an inheritance tax issue.
In my experience, equity release has significantly reduced the value of people’s estates and often comes as a shock to their families. In the above example, had the deceased not entered into equity release the beneficiaries of his estate would have inherited the full value of his house, say £200,000 instead they received only £130,000. Ultimately it is up to each individual to make the decision that is right for them, with the right advice, but my encouragement is to consider all your options first and make an informed decision.
For further information please contact Alison Craggs or another member of the Succession and Tax team.
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