We weigh up the perks and pitfalls of downsizing, lifetime mortgages and other options for retirees looking to tap into the value tied up in their home.
Whether you want to do up your home or help a grandchild on to the property ladder, or just need a bit more cash, tapping into the wealth built up in your property is one way to finance your plans. But with several options available, it’s important to weigh up the emotional and practical implications alongside the financial ones.
Taking advice is a must. ‘If you’re considering equity release, your adviser must talk you through all the different ways to achieve this,’ explains Dean Mirfin, chief product officer at Key. ‘Comparison with options like downsizing or taking a loan is the only way to make an informed choice.’
Move to a smaller home
Downsizing should always be the first consideration. Moving to a cheaper property can release equity and also mean lower household bills and less maintenance.
While you’re free to buy any property, if you’re aged 55 plus, it’s possible to move to a retirement property. As an example, McCarthy & Stone’s retirement developments typically feature one- and two-bedroom apartments with onsite facilities such as shared lounges, laundries and restaurants. ‘People can choose whether they want to close their front door or engage with the community,’ says Paul Teverson, director of communications at McCarthy & Stone. ‘Living in these developments often makes residents happier and healthier, but we can also provide personal care packages where necessary.’
The average price of one of its properties is £300,000, but you also need to factor in utility bills, council tax and the service charge. This is currently £35 a week, or £130 a week for the ‘retirement living plus’ support package.
Wherever you want to move, it’s important to consider all the costs. As well as estate agent and solicitor fees, there are also stamp duty and removal costs to consider. There are often additional costs, as Mirfin explains: ‘A lot of people underestimate the cost of turning their new property into their home. A new kitchen, a conservatory or a garden can eat into the equity.’
However, your choice is often about more than doing the maths. ‘It can be driven by your emotions,’ says Stephen Lowe, group communications director at Just Group. ‘Many people don’t want to leave their home: it’s where their friends are and now they’re retired they can enjoy the garden and having the grandkids to stay.’
In addition, there can be practical issues. Research from Legal & General Home Finance found that 49 per cent of potential downsizers were thwarted by a lack of suitable properties.
Become a tenant
But buying isn’t the only option, with some people preferring to rent in retirement. Although it’s possible to do this on the open market, specialist rental firms offer more appropriate terms. ‘We offer assured tenancies so you have the security that you can stay there as long as you like,’ explains Gillian Girling, chief executive at Girlings Retirement Rentals. ‘There’s a one-year minimum tenancy, but you’re free to leave whenever you like. Some tenants even move every year or so, treating it like a holiday home or following their kids around the country.’
Rental properties are often in the retirement housebuilders’ developments, so tenants have access to the same shared facilities. These extras plus the assured tenancy mean rent is slightly higher than on the open market. For example, Girling says the average rent is £750 a month for a one-bed apartment, with prices ranging from £495 to £1,000 plus. Rent is reviewed annually in line with RPI, capped at 6 per cent, and the company also charges a £200 reservation fee to cover the paperwork.
Renting does give greater flexibility around your finances. As well as saving the stamp duty you’d pay buying a new home, you have access to all the equity in your previous home, allowing you to help other family members or enjoy it yourself.
It’s not right for everyone, though. David Hollingworth, mortgage expert at L&C Mortgages, says that owning property is a national obsession. ‘We spend all our life trying to get rid of the monthly mortgage payment: replacing this with a monthly rent payment can feel wrong.'
Get a lifetime mortgage
If the thought of leaving your home doesn’t appeal, equity release enables you to stay put and tap into the equity in your property. The main form of equity release is the lifetime mortgage, which allows you to borrow against the value of your property.
You’ll need to be at least 55 years old, with a home worth at least £70,000. The amount you can borrow depends on your age. For example, Mirfin says the maximum for someone in their 60s is about 35 per cent of the property value, with this increasing to 55 per cent for someone in their 80s. ‘Most people don’t max out the amount they take,’ he adds. ‘The average is around 13 per cent.’
With more than £3 billion of equity already released, the market is competitive. As a result, a variety of products and features are available. These include drawdown, where you only take – and pay interest on – what you need, and inheritance protection to give you the certainty that some of the value of your home can be left to loved ones.
The finances do need careful consideration. Although you don’t need to worry about the costs associated with moving, you will pay interest on anything you borrow. ‘Rates range from below 4 per cent to around 6 per cent,’ says Lowe. ‘You can repay the interest if you like, providing there aren’t any early repayment charges, or leave it to roll up, with the entire debt becoming repayable when you die or move into care.’
In addition, there are fees associated with arranging equity release. Lowe says these include a legal fee of around £600 plus an arrangement fee and an advice fee of around £550 each.
If you do intend to leave the interest to roll up, it’s worth using a simple rule of thumb to work out how quickly the debt will grow. Dividing 72 by the interest rate gives you the number of years it will take for the debt to double.
There are other options available too, especially if you’re looking for a boost to your capital. As an example, a recent addition to the market is the retirement interest-only mortgage (RIO). This allows you to borrow a lump sum but, as you pay monthly interest on the loan, the debt doesn’t increase and is repaid when your home is sold.
Although only a few lenders including Leeds Building Society and Hodge Lifetime are offering RIOs, Hollingworth expects they will become more mainstream. ‘Interest rates are slightly higher than in the standard market – for instance the Leeds Building Society has a five-year fix at 3.62 per cent,’ he explains. ‘You will need to prove affordability and the maximum LTV is 55 per cent at Leeds, although some lenders will offer higher levels.’
Where a smaller amount is required, a bank loan or credit card may be more appropriate. For example, rates as low as 2.8 per cent are available on £10,000 loans repaid over five years, or for smaller amounts a 0 per cent credit card could give you up to 15 months to repay without incurring any interest.
With so many different options available, understanding what’s possible and how it might affect your finances is essential. ‘Weigh up all the options and discuss them with your family,’ adds Mirfin. ‘They might have views on what you should do, and may even be able to help with your finances.
Case study: downsizing v equity release
Mr and Mrs Smith, aged 71 and 69 respectively, live in a £600,000 four-bedroom property in Bedford. They would like to help their six grandchildren with university fees and mortgage deposits.
Downsizing: If they move to a two-bed flat in Poole costing £425,000, these are the rough costs:
This would leave them with £150,000 of equity following their move.
Equity release: The Smiths could access £150,000 of their equity by taking out a lifetime mortgage. Some of the grandchildren are still at school, so they are able to stagger when they take the equity, drawing down £75,000 initially. The best rate for this would be 3.65 per cent from Legal & General.
This exercise can be repeated, drawing down a further £75,000 for the remaining grandchildren.
Raise cash while staying put
Borrowing money is one way to remain in your home but, depending on your needs and preferences, other options may be worth considering.
Become a landlord
Taking in a lodger or having an Airbnb-style rental arrangement can generate additional income. There’s some work required and the income isn’t guaranteed, but there are tax breaks to make it more appealing. The Rent a Room Scheme allows you to earn up to £7,500 a year tax-free and there’s also a £1,000 property income allowance if you’re letting a self-contained property.
Share your home
Initiatives such as Homeshare and Shared Lives allow you to exchange free or low-cost accommodation for an agreed level of support. This could include household tasks, gardening or simply companionship. Joe Oldman, policy manager – housing and transport at Age UK, says these schemes have proved successful in other parts of the EU but are less common in the UK. The Shared Lives Plus website has more information.
Apply for a grant
If you’re struggling in your home, a disabled facilities grant could help with adaptations such as ramps, stairlifts and downstairs bathrooms that could help you remain independent. Grants of up to £30,000 are available in England, although eligibility depends on your income and savings.
Check your benefit entitlement
As many as six in 10 retired homeowners are failing to claim their full benefit entitlement, according to Just Group. Common benefits that go unclaimed include pension credit, council tax reduction and disability living allowance with the average annual shortfall standing at £1,013.