Equity release has become an increasingly popular financial planning tool over the past few years following significant increases in UK house prices, and a much wider range of lenders offering competitive interest rates. It provides a way to access locked-in capital through a loan against the value of a property.
People are using equity release to make up shortfalls in their own income, pay off existing mortgages, fund home improvements or meet the costs of care. Others use the money to help with family spending – such as school fees for grandchildren or the deposit for a first flat.
Equity release is an effective way to pass on wealth that is tied up in residential property, reducing IHT liabilities if the client survives seven years, and providing capital for the next generation at a time when they need it. The debt and rolled-up interest are both normally deductible for IHT purposes.
Take advantage of favourable rates and high loan to values
The interest rates on equity release products were 6% a year ago and fell to as low as 3.5% in the final few months of 2016. As a result, the market has grown by 40% over the past year. Although they remain attractive today, rates are beginning to rise so anyone thinking about using equity release may want to start the process sooner rather than later.
Fixed rates can be secured for life and the interest is rolled up so the client does not pay anything until the loan and interest is redeemed when they die or move permanently into a care home. With variable rate products, it is possible to make regular interest payments.
Meanwhile, the maximum equity that can be released is falling as lenders become concerned about the future of UK residential property prices and increasing longevity. In addition, lenders were not postcode underwriting previously to any noticeable extent but they are now.
Equity release in practice
We have recently dealt with the following two cases:
- Releasing £3 million from a property worth £12 million on a fixed interest rate of 3.8%. The client gifted the full amount to children and grandchildren, and purchased a gift inter vivos insurance policy to cover the IHT liability over the next seven years.
- Releasing £300k from a house worth £2.2 million on a fixed rate of 3.6% for clients who required the money to cover their day-to-day costs. The arrangement included a reserve facility for a further £300,000, which the clients can draw down at any time, although the interest rate is not fixed for these reserve funds.
Equity release can make good financial sense but it’s important to seek financial advice to make sure you choose the right route. John Lamb’s approach is based on providing a personal service, and working in partnership with accountants and lawyers to provide clear guidance.
If your clients are looking for expert advice about equity release from a leading firm of chartered financial planners, we would be delighted to help you explore the options. Working together, our dedicated team exceeds the level of expertise and high standard of service your private clients expect.