Many moons ago I became aware of equity release products where a company would essentially buy your house for a well below market price but allow you to remain living there for the rest of your days for free whilst having a substantial bank balance to do with what you want. Assuming you were asset rich but cash poor, this was ‘jam today, sorry kids no jam tomorrow’!!
Things have moved on and as I have been looking at Inheritance Tax Planning looked into Lifetime Mortgages which release capital, accrue interest at a low rate, retain flexibility – make no payments or pay off to suit yourself as well as having what could be a tax free lump sum to spend or pass to the kids before you die and watch the smile on their little faces beam – This can be given them without them having to pay tax too under UK tax rules.
The 7 year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
|Years between gift and death||Tax paid|
|less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
When my wife and I looked into this recently with David Forsdyke from Knight Frank Finance we decided this wasn’t for us just yet but may be for the future. There was NO hard sell and we were very pleased with the meeting, so much so I would like to share some of the details with you. (Just to be sure this is my true and honest recommendation from personal experience and I don’t receive ANY benefit from passing this on – just a warm glow from knowing this might help one or two of you out there!!)
Home finance options for older homeowners are better than ever before
David Forsdyke, Later Life Finance expert with Knight Frank Finance, describes the increasing choice of good value products available for older homeowners, and why professional advice is now more important than ever.
I’ve been involved in the mortgage market since 1994. In 2005 I decided to take an additional qualification in Lifetime Mortgages as I could see a growing need for advice to homeowners over 55. Options for older borrowers were very limited back then, and interest rates were high (Lifetime Mortgages were around 7%).
Roll the clock forward 15 years to today and, I’m pleased to say, we have a very different picture! Older homeowners have more choice than ever before when it comes to borrowing or refinancing options. In addition, interest rates for Lifetime Mortgages have dropped dramatically, with lenders offering the lowest rate we’ve ever seen, starting at 2.22%*. Lifetime Mortgages are fixed for life, so for many this could be the ideal time to lock into a long term cheap rate.
This is good news for those in or approaching retirement, but it does come with some challenges. Lifetime Mortgages have evolved dramatically in the last few years, with flexible features and a host of other new benefits to be considered. However, navigating a way through the choices to the right solution is tricky. Cheapest isn’t always best, so it is now more important than ever to get good quality advice. A host of other mortgage and borrowing options for those in or approaching retirement have also emerged in recent year. If you’re over 55 you now have a wide variety of mortgage and home finance solutions available to you.
With increased choice comes an increased risk of picking the wrong solution. It is therefore important to understand all the options and to seek advice from someone who has clear view across the whole market in order to determine what the most appropriate answer is.
What is ‘Later Life Finance’?
We use the term to describe any product that might be appropriate for an older homeowner. Many lenders in the ‘Later Life’ space have set a minimum age of 55. The products now available for older homeowners include;
Unlike a normal mortgage, this has no fixed term. Instead the loan runs until the borrower(s) die or have to move out permanently into care. At that point the property is sold and the mortgage repaid. Interest is charged in the same way as any other mortgage, but with a Lifetime Mortgage the borrower can choose to let it roll up on top of the loan, pay some or all of it each month, or make ad hoc repayments. The amount you can borrow is based on your age and the value of your property.
Retirement Interest Only Mortgages
Often called RIO Mortgages, these too have no fixed term. The loan runs until the borrower(s) die or have to move out permanently into care. The borrower pays the interest every month.
Hybrid mortgage products
The term ‘Hybrid’ is often used to describe mortgage products that look like a regular mortgage, but then allow you to transition into a Lifetime Mortgage at a later date.
It used to be that mortgage lenders would draw the line at a certain age, refusing to lend beyond the age of, say, 75. An increasing number of lenders are reviewing and extending their criteria, and some now allow for older borrowers or have removed their age limits.
Bridging Loans and second charges
In some scenarios, access to short-term borrowing can be a huge advantage. For example, if you are downsizing but want or need to move into your new home before your current one is sold, a bridging loan with retained interest (so there are no monthly payments) can be a useful tool in giving you time to sort out your current home.
Why would I need to borrow?
The reasons our clients are accessing the wealth tied up in their homes vary, but the most common are;
- Making home improvements. For example, a new kitchen and bathroom can make your home a more comfortable place to live in the long term.
- Repaying mortgages and debts. Tidying up your finances can help maximise your retirement income.
- Making gifts to children and grand-children. Helping younger generations step onto, or up, the property ladder can be very satisfying.
- Estate Planning. Inheritance Tax is something that can be minimised with careful planning, and raising a debt against your property can be a sensible part of the plan.
How do I work out what’s best?
I recommend you seek advice from an adviser who can give you as broad a view as possible, and who has access to the full range of products and options. They must be qualified not only in Mortgages but also in Equity Release to give advice on all the options above. You’ll need to think carefully about what you need both now and in the future, as you don’t want a product that could cause you difficulties in, say, 10 years’ time.
At Knight Frank Finance, our advisers are fully qualified and are not tied to any provider. This means they will can look across the whole market for you and determine the most suitable solution for your needs.
If you are over 55 and are thinking about releasing the wealth tied up in your property, speak to David directly on 01483 947 764, or email him at firstname.lastname@example.org.
*Based on Lifetime Mortgage rate research on 26th October 2020, the lowest available rate is 2.22% (MER) 2.24% (AER). The actual rate you will pay depends on your age, the value of your property, and the lenders criteria at the time of application. Speak to an adviser to find out more. Before you make a mortgage application, Knight Frank Finance will carry out a full review to establish your needs and preferences and if you meet the criteria, they will give advice and make a recommendation to you. Knight Frank Finance do charge a fee for mortgage advice which is typically payable on completion. An initial consultation is free of charge. All mortgages are subject to status.
Knight Frank Finance LLP is a limited liability partnership registered in England and Wales with registered number OC322399. The principal office of Knight Frank Finance LLP is situated at 55 Baker Street, London W1U 8AN. Knight Frank Finance LLP is authorised and regulated by the Financial Conduct Authority under Financial Services Register number 459093.