Confusion reigns at a time in life when stability, financial security & freedom to enjoy the fruits of one’s success should be evident. Yes, we are talking retirement, equity release & the increasingly popular Halifax Retirement Home Plan.
We discuss the options available to those already retired or the up & coming baby boomer generation, as they prepare to assess how they are to manage in today’s financial maelstrom.
For many, & usually it all boils down to lack of financial planning in earlier life; retirement is none of the aforementioned attributes associated with the longest holiday of your life.
We all go through life thinking retirement seems a distance over the horizon. From getting that first job, raising the children & moving up the ranks in the employment world, our lives move forward apace.
But the inevitable will reach us all one day & without foresight retirement could be the biggest challenge in your lifestyle thus far.
So how should we prepare & how do we invest in our futures to ensure a retirement of fulfilment?
The spoken word, ‘hope for the best, prepare for the worst’ must have a ring of truth when it comes to retirement planning. It’s a recipe on the menu that’s always put on the back burner & one on the ‘to-do’ list of things that can wait until tomorrow…YOU CAN’T.
Looking back at that first job is where the seeds should initially be sown. Whether it’s joining that company pension scheme or making your own provision, a pension should be the life jacket for your retirement.
The old adage of the earlier you start a pension the less you need to pay in later, is gospel & with the tax advantages on offer they still represent one of the best ways to build a pot of gold for the future.
But there are other options now available which represent a safer alternative & more hands on approach such as real estate.
The buy to let market is currently undergoing transformation in the current economic climate, with rental incomes outstripping savers returns on bank & building society accounts. There is also the potential capital appreciation aspect of owning a property which has been a tried & tested route for many over the longer term.
Property is a tangible asset; you have control over how it looks, you can manipulate it & affect its value. The sole aim of these actions is to build asset value & thereby probably without hindsight, can build yourself a ‘retirement vehicle’.
So let’s see which vehicle will suit your requirements & enable you to navigate down the retirement highway…
Firstly, the question that needs to be asked is whether an income or capital lump sum is required? Given the fact that most tax free cash requirements are for capital, the options are then narrowed down to affordability in retirement.
The next important consideration is whether one can support the monthly payments of an interest only mortgage, or are finances so tight that no further monthly payments are required throughout retirement. The answer to this will filter us towards the ultimate decision; that is whether the solution is an interest only lifetime mortgage or a roll-up equity release scheme?
On the one hand you have an interest only mortgage, where monthly payments are required to be maintained for the rest of your life & results in a continuously stable & level balance during the remaining term.
This is in complete contrast to a lifetime mortgage plan, which requires no monthly payments whatsoever, but allows the interest to compound & the balance of the mortgage to get larger.
Let’s have a look the features of each option further.
Roll-Up equity release scheme
- Classified as a Lifetime mortgage, hence no term is specified
- Schemes are regulated by the FSA & are also members of SHIP
- Equity release schemes start at age 55
- No income required for eligibility
- Maximum release is 55% of the property value (with ill-health)
- Credit history is not a major concern to equity release companies
- No monthly payments required
- Increasing balance as the interest is compounded monthly or annually
- Flexibility of drawdown schemes available to take regular cash releases with guaranteed reserve facilities. This ensures future cash availability with no further costs.
- Interest rates are fixed for life
- Reduced, or no inheritance left for the beneficiaries of the estate
- Executors have upto 12 months in which to repay the lender, usually by sale of the property
Halifax Retirement Home Plan
- Classified as a Lifetime mortgage, hence no term is specified
- Pensioner mortgage & regulated by the FSA
- Starting age is 65, however with enough pension income, over 55’s are acceptable
- Retirement income alone will determine how much that can be borrowed
- The maximum amount borrowed is capped at 75% of the property valuation
- Credit history is checked & any adverse record could result in a declined application
- Monthly payments must be maintained to avoid repossession
- Mortgage balance remains exactly the same throughout the plan term
- Further advance application required to borrow additional funds & will be credit assessed each time for affordability.
- Option of tracker & fixed rates available, initially for a maximum of 5 years. Therefore, no guarantee of the future costs of the monthly mortgage payments.
- Reduced inheritance, albeit a specific amount which the beneficiaries will know the extent
- Beneficiaries have 18 months in which to sell the property, after death or the mortgagors moving into long term care.
So the winner is?
There is no actual winner in this pensioner mortgage market.
Both schemes have the advantages & disadvantages depending upon one’s retirement finances.
However, if a good retirement & disposable income is available & future affordability secured, then certainly the Halifax Retirement Home Plan is justifiable for the applicants & more so for the beneficiaries. Nevertheless, it is vitally important that steps are also taken to protect each party to the interest only retirement mortgage in case one applicant dies as the survivor will still need to maintain the monthly payments. Therefore, life insurance should always be considered on the Halifax Retirement Home Plan.
Alternatively, for those on lower incomes, less of a disposable income & are not too concerned about their children’s inheritance, then a roll-up equity release mortgage could be their preference. The roll-up equity release schemes have no effect on monthly budget & can never result in repossession based on lack of affordability or missed payments.
These schemes can be classed as a ‘mortgage of last resort’ as once all the alternatives have been considered & eliminated. Equity release roll-up can always be the backup plan. Even more so should one default or struggle with the affordability of an interest only lifetime mortgage such as the Halifax Retirement Home Plan, as equity release schemes can be used to clear the Halifax mortgage.
The following is an equity release tip – to ensure that equity release can act as a safety net, if you are looking to borrow on a Halifax equity release scheme then always consider & keep within the loan-to-value limits of the equivalent equity release scheme rules. If you do this then you have equity release as a fall back to switch to in the future.
There are many more tips & advice available on this subject, but as always seek an independent financial advisory service such as Equity Release Supermarket who are qualified & experienced in these two specialist fields.
For help on deciding which type of equity release is best advice for yourself, please contact the Equity Release Supermarket advisory team on freephone 0800 802 1051 or email [email protected].