With changing attitudes towards inheritance planning, and generational gifting becoming increasing common practice, we look at why equity release is being more widely used as the retirement vehicle of choice.
Having advised on equity release schemes for the past 14 years, we’ve witnessed firsthand the sea change in perceptions over how much of an inheritance parents are now wishing to leave their children.
Couple this with the growing acceptance of retirement equity release schemes by the over 55’s, we are now seeing real evidence through equity release enquiries the lengths parents are actually prepared to go to for their children.
Why a shift towards equity release?
In the early days of lifetime mortgage & home reversion plans, people were looking towards a release of equity mainly for lifestyle purposes; a new car, holiday or extra income. Today’s economic environment throws a different light on the real purposes for releasing equity – necessity (mainly debt consolidation) and generational gifting.
Equity release schemes are now providing a vehicle of choice for many that were once looking towards the retirement mortgage market when they reached state pension age. With schemes such as the Halifax Retirement Home Plan now being made redundant & mortgagees reigning in their lending criteria on the much maligned interest only mortgage, it has left little scope for retirees to find a route into secured lending.
How can equity release schemes assist?
Basically anyone over the age of 55, with a main residence valued above £70,000 could become eligible for an equity release mortgage. Further criteria does apply, such as any existing mortgage, property type etc, however in principle age & valuation are the main eligibility factors.
To ascertain your maximum release, tools such as our equity release calculator are available on the Equity Release Supermarket website. Based on the age of the youngest applicant & the current sale value of your home, the equity release calculation will prove of assistance as to whether you can raise sufficient funds to meet your financial objectives.
For those with an outstanding mortgage leading upto, or actually in retirement, equity release schemes have become a get out of jail card. Having a mortgage at retirement is not a crime, however the ability to repay it has become a problem for many as lenders are beginning to tighten their belts on mortgages into retirement. We have instances of clients anticipating renewal of their mortgage at retirement, only to see panic set in when their lender refuses to extend & then rub salt in the wound by demanding repayment. This would ultimately result in either a remortgage, which is becoming increasingly difficult, or sale of the property to downsize. Neither offer stress free options!
Bearing in mind these mortgages were actually set up with a final repayment end date, one cannot always expect in today’s economic environment the banks to be that sympathetic in such instances. However, some leniency would be welcomed, or maybe that’s just wishful thinking.
Equity release functionality
We have therefore seen how people are entering retirement still tied down with a mortgage. However, there are also an increasing number with unsecured debts, predominantly credit cards which people have trouble shifting once their income drops entering retirement. Perhaps realisation that there income has fallen hasn’t yet set in, which coupled with household spending continuing apace, sees the error of their ways without re-addressing the fundamental principle of ‘budgeting’.
The 'equity release safety net' is becoming a credible solution for many in such situations. By taking a lifetime mortgage scheme, whether on a roll-up basis or more commonly an interest only lifetime mortgage, the debts can be consolidated into a secured loan fixed for the rest of their life. Depending on affordability once the debts were cleared, and attitude towards children’s inheritance, would determine whether the interest only, or roll-up version is selected.
Choosing roll-up means NO monthly payments. This has a benefit in leaving a household budget with a greater disposable income, particularly if all debts have been repaid. The negative aspect of roll-up is that the balance will increase over time therefore eroding, all or some of the kid’s inheritance. There are other factors that could affect the size of the inheritance, the main one being how much property values could increase by over their lifetime. Everyone has their own opinion on that.
Selecting an interest only lifetime mortgage engages an element of future discipline in that regular payments need to be maintained. However, there are significant advantages. These are that as the interest is being paid monthly, the debt will remain level for the duration. This has the added benefit that if house prices do increase, there could be an even larger inheritance to leave, even after you have taken a release of equity for yourself. With interest rates on these schemes starting at 5.59% (6.0% APR) and fixed for life, interest only lifetime mortgages now offer a credible equity release solution for many that were starting to despair at their lack of options.
Equity release gifting acts as a form of ‘early inheritance’
Finally, we touch on the growing realisation that children seem to have of accessing their inheritance now, rather than later. With difficulty for first time buyers in the current property market, the younger generation have turned to the bank of mum & dad for the answer to getting on the property ladder – using equity release.
This has been the biggest change in attitude we have seen in the 14 years of equity release schemes.
It has been two-fold: -
the acceptance of parents to gift an inheritance now rather than later
that the stigma of having to leave an inheritance when they die has gone
Increasingly, parents are taking equity out of their properties to gift to their children, mainly to invest in another property, occasionally for business or divorce purposes. It maybe all too easy for the children to say they would like their inheritance now, which is all well & fine if this is being taken out of their parents house & re-invested into their first property. Couple this with the governments help to buy scheme & providing 20% deposits leaves some children not having to strain themselves too much financially these days, judging by the many options available.
Is Equity Release a great idea or not?
Some may say so; others may feel that the younger generation gets it too easy these days. Mortgages of old were also hard to come by & you had to save over a long period of time to find your deposit. Your lender even had to be the bank you held your account with!
It just seems the ‘I want it now’ attitude has arrived & the old fashioned ways of striving to find the deposit seem to have disappeared.
Whatever the consensus of opinion is, equity release is here to stay and finding such helpful scenarios of inter-generational gifting to become an advantage is certainly to be welcomed.
To discuss the topical areas within this article, or find out more about equity release and its uses, please contact the Equity Release Supermarket team on Freephone 0800 678 5159.
If you prefer to discuss in confidence, please send your email to firstname.lastname@example.org.