The British obsession with home ownership means many of us focus on our mortgage at the expense of retirement savings. But although this strategy means more people are living in large, expensive homes when they retire, pension income may be seriously lacking as a result.
Winding back the clock to redress the financial planning balance isn’t an option, but there are a number of ways to supplement your retirement income by tapping into your bricks and mortar. ‘What’s right will depend on your circumstances, but it can be an emotional as well as a financial decision,’ explains Alex Edmans, spokesperson for Saga Equity Release Service.
The first option to consider when looking to access the money tied up in your bricks and mortar is selling your home and either buying a cheaper property or renting. ‘Downsizing is sensible if you’re in a property that is too big for your needs,’ says Patrick Connolly, certified financial planner at Chase de Vere. ‘If you sell your home and buy a smaller one, this should release capital that you can invest to generate an income.’
But while this is the most cost-effective option, it’s not always the most practical. Buying and selling property can be a stressful process that takes up a great deal of time and becomes costly in terms of estate agent, surveyor and legal fees.
It might also prove difficult to generate sufficient capital, as Steve Rees, managing director of debt management company Vincent Bond, explains. ‘You might have to consider moving to a different, cheaper area in order to release the amount of equity you need. This might not be to somewhere desirable, and could mean moving away from friends and family.’
Moving to a rented property instead of buying one can give you more flexibility, as we recently reported in our Renting in Retirement feature. Assuming you sold your home and were left with £300,000 to invest, this would generate an annual income of £9,000 if you achieved a return of 3 per cent. This would give you £750 a month to cover rent and supplement your pension. Connolly isn’t convinced, however. ‘The cost of renting can be expensive and could deplete your capital,’ he says.
Another major catch is the lease. With a standard assured shorthold tenancy, you can only guarantee that you’ll be able to stay in the property for a fixed period, typically six or 12 months. To provide more security, some companies, especially those specialising in retirement rentals, will offer an assured tenancy that allows you to live there as long as you want.
But whether you choose to rent or buy, downsizing can be particularly tough emotionally. ‘A lot of people just don’t want to move,’ says Edmans. ‘Where it’s been a family home, it can be full of memories that they don’t want to leave behind. It can be really hard.’
If you’re determined to stay put, equity release is an option. This allows you to access some of the value of your home, through either a lifetime mortgage, where a fixed rate of interest is charged against the amount you release, or the less common option, a home reversion scheme, where you actually sell part or all of your home.
Whichever product you use, you’ll have the right to stay in the property until you die or move into a care home – at which point your property will have to be sold to pay off the equity release company.
With both products, the amount you can take is dependent on the value of your property and your age, with the amount generally increasing as you get older. Although there will be a cap on the sum available to you, there is some flexibility, as David Hollingworth, head of communications at London & Country Mortgages, explains. ‘You can take less than the maximum, leaving you with the option to release further funds later on,’ he says. ‘Alternatively, some lifetime mortgages agree an amount upfront and you drawdown what you need as and when you want it. As interest is only charged on the amount you’ve taken, this can be a lower-cost option.’
Equity release downsides
But, while the fact that you are able to stay put means this can seem a relatively simple and attractive way to release money from your home, the downside of equity release is the cost. With both types of scheme, you’ll pay a premium for the right to continue living in the property. Rees explains: ‘These products can be expensive, so it’s essential that you understand the financial implications. If you use a home reversion scheme you won’t receive the full value of the property, and if property prices rise you will only benefit from this on the part of your home that you’ve retained. With a lifetime mortgage, as the interest rolls up, it can be very difficult to work out how much you’ll end up owing.’
In addition, as the interest compounds on a lifetime mortgage, the amount you owe can grow quickly. Even at the current relatively low rate of 6 per cent, the size of your debt will double every 12 years. This means that if you take out a lifetime mortgage to release £50,000 at age 63, by age 75 you would owe £100,000 and by age 87 it would have increased to £200,000.
And higher interest rates speed this process up even more. At 7 per cent it will take just over 10 years to double, and at 8 per cent that falls to nine years.
Although there is a risk that the interest on a lifetime mortgage could swallow up the total value of your home, there is some protection. Products carry a ‘no negative equity’ guarantee, which ensures that the company will not look to recover more than the value of your property from you or your estate.
The features of the products used for equity release do mean that they’re not suitable for everyone. Connolly says a lot of people who start out wanting equity release often end up looking at other options instead. ‘Charges can be high, some products are complicated and don’t represent good value, and using a lifetime mortgage can quickly erode any inheritance you might want to leave. It’s right for some people – but go into it with your eyes wide open,’ he says.
And although you may have retired, a standard mortgage could also help turn your home into upfront cash. Hollingworth says although most lenders won’t go beyond age 75, a repayment mortgage could be an option if you want a smallish amount to cover something like a new car, conservatory or a big holiday. ‘You’ll need the income to make the repayments, but low mortgage rates mean this can be an attractive option,’ he adds.
These are the main options available to tap into the cash in your home, but Edmans says there could be other ways to achieve this. She explains: ‘Do speak to your family before you do anything. They may have different views and be able to help out with extra income, a loan or possibly even buying your home. It’s definitely worth exploring this first.’
Rise of the 'grandlord'
Letting out a property to generate an additional income stream is becoming increasingly common among retirees, according to research by Simply Business. It found that the number of over 65s becoming ‘grandlords’ had increased by 11 per cent in 2012 and by 33 per cent since 2009.
‘In some parts of the country it can be difficult to sell a property, so letting it out is an option for people keen to downsize or move into the rental market. Doing this also produces an extra income stream, which has become increasingly important as pension values and interest rates on savings have fallen,’ explains Jasper Martens, head of marketing and communications at Simply Business.
But while it can generate much-needed income, becoming a grandlord is not without its challenges. Void periods and repairs can unexpectedly eat into your income stream, and you might want to consider paying a letting agent to manage the property and tenants on your behalf.
More significantly, you may find it tricky to borrow money as you get older. David Hollingworth, head of communications at London & Country Mortgages, says that most buy-to-let mortgages are only available up to age 75. ‘Some lenders will go further: for instance The Mortgage Works will extend the loan to age 90 for an experienced landlord. Unfortunately, unless you can afford to buy the property outright, the scope to do this is fairly limited.’
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