Equity release specialist Mark Thomson joins us to talk about Inheritance Protection on Lifetime Mortgages.
Can inheritance protection make equity release more suitable for me?
One of the main reasons that people disregard lifetime mortgages is that they want to make sure they can leave some money to their children. Clients are often concerned about how much equity will be left if the mortgage runs for 10, 15 even 20 years. But inheritance protection addresses this concern.
We encourage clients to have an open conversation and even involve the children in the decision. Some will want their parents to enjoy their money and not worry about inheritance, others may really benefit from being left some funds. The most important thing is that there are no surprises for anyone after you die.
What does inheritance protection mean in the world of equity release and lifetime mortgages?
With a lifetime mortgage, you borrow against the equity in your house to boost your retirement income. Let’s imagine a 75-year-old has a house worth £250,000. At this age, they can borrow 48% against their home – about £120,000. Over the years, they build up interest on this borrowing, and they aren’t making any payments to reduce it.
The good news is that we only sell products with a no negative equity guarantee – so no one can owe more than the house is worth – but there is a risk that the interest builds up so much that there’s no equity left when the homeowner dies.
But at the outset, the client could protect some equity that will be left to their children. You state how much to protect – so for example this client might decide to get inheritance protection for £100,000 to be left to their dependents. This will reduce the amount of money lent, but more importantly, it doesn’t change the interest rate.
In our example, protecting £100,000 equity would leave the property value at £150,000. So the lifetime mortgage provider would potentially lend 48% of the £150,000, which is £72,000.
This is fairly new in lifetime mortgages, why has it been brought in?
In the bad old days of equity release, people were paying up to 10% interest on their mortgages, so it wasn’t long before their equity disappeared. In addition, the no negative equity guarantee didn’t exist, so it was a risky way to borrow. It also meant that people had nothing to leave their children, and sometimes even left them with a debt to repay.
Inheritance protection and other features are designed to make equity release more attractive and distance it from the horror stories of a decade ago, before full regulation came in.
Some people with old equity release funds are now taking out new deals to pay off their old ones because the rates are so much cheaper.
Who benefits from having inheritance protection?
In a way, everyone benefits. The children obviously gain the protected funds when the parents pass away, and the parents have the reassurance that their children will get the financial benefit.
The main thing is to understand clearly what your options are, what they will cost, and how much you and your children stand to gain. We’re always on hand to chat it through and explain in detail, as well as look at all the options, lenders, and products.