I'm thinking of unlocking cash from my home using equity release: Can I still leave an inheritance for my children?
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My husband and I are in our early 60s and plan to retire in the next five years.
Our pensions are relatively modest, but we own our home, which is worth around £525,000, outright.
We are considering using a lifetime mortgage, a type of equity release, to free up some money to make our retirement more comfortable.
However, we would still like to leave some money behind for our children after we are gone. Is it possible to keep some of the equity in our home back for that purpose?
Gifting: This couple would like to leave some money behind for their children, and want to know if this will still be possible if they choose to use equity release
This is Money replies: Your situation is relatively common. Many people approaching retirement may not have the luxury of a generous private pension, but will own a home that has increased substantially in value over the years.
Equity release makes it possible for over-55s to unlock some of the equity in their home, with the money usually only needing to be paid back from the sale of the property after they die or go into long-term care.
Many choose to use equity release to boost their lifestyle in retirement, for example by renovating their home, paying off debts or simply having the funds to enable them to live more comfortably.
Once any existing mortgage is repaid, which is a condition of equity release, the money is theirs to enjoy spending.
In the first half of this year, 29 per cent of equity release borrowers used the money to improve their home, according to equity release advisor Age Partnership+, and 24 per cent used it to repay their existing mortgage.
A lifetime mortgage is the most popular form of equity release. This type of plan allows homeowners aged over 55 to access up to 53 per cent of their home's value in the form of tax-free cash, starting from a minimum of £10,000.
How much they can release depends on age, property value and their individual needs.
> How much equity could you release? Use our free calculator
Advice: It is a requirement that equity release borrowers consult a professional before making a decision, to make sure they are fully informed
Interest on the borrowing 'rolls up' each month, so the impact on the borrowers' estate can be substantial – especially for younger borrowers who may have the plan for several decades.
However, some modern equity release plans have the option to make voluntary interest or capital repayments during your lifetime, which can reduce the end balance. This is subject to certain limits, and early repayment charges may apply above a set value.
It is important to familiarise yourself with how this works before making your decision.
Generously, you want to pass on some of the property wealth you have built up over the years to your children. That may be possible using equity release, if you opt for a plan that offers what is called 'inheritance protection'.
A specialist equity release adviser such as those at Age Partnership+ can point you to plans which allow you to do this, and help you decide whether it is right for you.
> Find out more with a free guide to equity release
When you arrange your plan, you would be able to select how much of the cash tied up in the home you want to hold back.
'It works by enabling you to select a percentage of the property value that you want to protect,' says Andrew Morris, senior equity release adviser at Age Partnership+.
'The higher the percentage you select, the smaller the maximum loan amount will be available to you – so you need to speak to your advisor to see if it's suitable for your situation.'
If you already wanted to borrow the maximum 53 per cent or close to it, ringfencing an inheritance from your home may not be possible. Opting for inheritance protection may also increase the interest rate on the borrowing.
Andrew Morris of Age Partnership+ says some equity release customers may be able to select a percentage of the property value and protect it as an inheritance
A benefit is that inheritance protection allows your children to benefit from growth in the value of your home after the plan is taken out.
Andrew Morris says: 'The protected inheritance is worked out on the sale value of your home, so the more your home goes up in value, the higher the monetary amount that is protected'.
A decrease in property value would mean a lower monetary amount would be protected, depending on the percentage protected when the plan was taken out.
It is also worth noting that all plans which meet Equity Release Council product standards offer a no-negative-equity guarantee, which means your estate will never owe more than your property is worth when it is sold.
Other ways to preserve an inheritance
Another way to keep the costs of equity release down, and potentially leave more left over for your children after you are gone, is to pay off some of the borrowing as you go.
You can choose to pay off the interest, which would stop it from compounding – another word for paying interest on interest.
If you chose to pay the interest and also some of the balance, the debt would reduce over time.
Both of these would mean that, once the home was sold, less of the money would go towards paying back the loan, with the remainder inherited by your children providing they are named beneficiaries, for example in your will.
Borrowers can choose to make a fixed monthly payment, which some find helps them to budget, or by making ad-hoc payments as and when they can afford them.
Certain limits will apply, for example some lenders set a minimum repayment of £50 at any one time, and a maximum of 10 per cent of the amount borrowed. Early repayment charges may also apply above a set value.
'Some plans allow you to make regular repayments until the debt is completely repaid, should you have the means to do so, in a similar way to a conventional mortgage. An advisor will help you understand if your plan has this feature' explains Morris.
Some lenders will offer reduced rates if a person can commit to a fixed regular repayment, but this needs to be agreed at the outset.
All new plans which meet Equity Release Council standards offer the ability to make repayments, if the borrower wishes.
Morris says that, in some families, children could volunteer to make repayments, in order to preserve the family's estate – particularly if their parents have previously gifted money to them.
Could their children keep the home?
In most cases, the home is sold when the last borrower passes away or enters long-term care, as the debt to the lender must be repaid.
However, if the children have the means to do so, it is possible for them to remortgage the home into their own name, and use the funds to pay back the equity release lender – thereby enabling them to keep the home.
In the family: Usually, the home is sold at the end of an equity release plan in order to pay off the loan. However, there is the option to remortgage into someone else's name, if they qualify
They could also use another equity release mortgage to effectively buy out the old deal if they were over 55, or pay in cash if they were able.
Most lenders allow 12 months to repay back the equity release loan, which means there is time for this to be arranged.
Advice is required before proceeding with equity release, and advisors at Age Partnership+ can help you explore your options.
Equity release may involve a home reversion plan or a lifetime mortgage, which is secured against your property and will reduce the value of your estate and impact funding long-term care.
Initial advice is provided for free and without obligation. Only if your case completes would an advice fee of £1,995 be payable. Other lender and solicitor fees may apply.
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