How to make your property pay for your retirement?

Until recently, the combination of a generous final-salary pension and its state equivalent meant many people could look forward to enjoying a carefree retirement.

Sadly, especially for those employed in the private sector, that’s no longer the case.

However, any homeowner, whatever their age, has at least one thing in their favour: a property that could possibly provide them with a lump sum to fund their retirement. With life expectancy in the UK now at 81 years, it’s something many of us may have to consider if our pension pot and savings don’t match our lifestyle aspirations when we retire.

Lifetime mortgage

A ‘lifetime mortgage’ is the most popular type of equity release as, unlike a ‘home reversion plan’, it enables you to continue to own 100 percent of your home, while also releasing a tax-free lump sum from the value of your property.

This type of loan doesn’t require monthly repayments, although some lenders let you make them if you wish, instead of ‘rolling up’ the interest.

The original loan amount and the rolled-up interest is repaid to the lender by your estate when you die, move home or move into long-term care.

It’s worth noting that if you’re part of a couple who are both party to the mortgage, the repayment won’t be made until the last remaining person living in the home either dies or moves into care. This means both you and your partner are free to live in your home for the rest of your lives.

Lifetime mortgages can allow you to choose to receive your cash either in one lump sum or in smaller, regular payments. Some plans also have an option to increase the amount you’ve borrowed as a draw-down facility which can be accessed when/if you decide to (up to the maximum limit agreed with the provider).

Advantages of a lifetime mortgage

• Plans are available from the age of 55 years
• The cash you release is tax-free and there are no restrictions on how you can use the money
• You continue to own your home and so will benefit from any increase in its value
• There is no requirement to make monthly repayments, though some lenders will let you if you want
• Lifetime mortgage plans can allow you to protect a percentage of your property value so that your family can inherit a part of the property’s value (dependent on how long the loan is taken out for and how much interest gets rolled up).

Disadvantages of a lifetime mortgage

• The amount of the lifetime mortgage loan will grow over time, due to the accrued interest rolled up on top of the original loan amount
• If you want to increase the amount of equity released beyond the original amount agreed, you will normally have to apply for a further advance. This may not be guaranteed – unless you choose to opt for a ‘draw-down lifetime mortgage’ where a pre-agreed total loan amount will remain accessible to you after the initial amount has been taken
• Your tax position and eligibility of means-tested benefits may be affected, as might your options for moving or selling your home in the future
• The amount of your estate that you will leave as an inheritance will be reduced
• If you wish to pay off the equity-release plan early, you may have to pay an early repayment charge. Note: these differ from plan to plan
• Younger borrowers with a higher life expectancy are likely to see a higher level of rolled-up interest
• Moving home may prove difficult

Retirement interest-only mortgage – ‘RIO’

Another option for using your home’s value to fund your retirement is a ‘retirement interest-only’ mortgage (a ‘RIO’). This is similar to a standard interest-only mortgage but with two important differences.

Firstly, the loan is usually only paid off when you die, move into long-term care or sell the property, so there’s no set redemption date. Secondly, you only have to prove you can afford the monthly interest repayments. Many RIO schemes have a maximum age of 80 years at outset.

The main advantage of a RIO is that as you’re paying the interest on the loan, the total loan amount will not increase (compared to a lifetime mortgage where interest accrues). So as long as you can pay the monthly interest payments you’re more likely to be able to leave an inheritance to loved ones or use the remaining capital to pay for your long-term care once the home is sold and the original loan amount is repaid.

Also, RIOs are generally cheaper when compared to most lifetime mortgages.

Get the right advice for you

Borrowing money against your house, especially when it’s to fund your retirement, is not a decision to be taken lightly. Obtaining expert advice from an independent mortgage broker like Charles Cameron & Associates is a great way to ensure you get a mortgage that’s right for you and the people you’ll one day leave behind.