Equity Release and Care
Using Your Home to Pay for Care – Equity Release Options
On The National Careline helpline one question comes up very regularly and that is: I want to remain in my own home, so how do I pay for my care? When talking with people about their options for their care, most by far want to stay in their own home, and have someone come in to provide the help they need. People are happy and settled in their surroundings and they tend to live much longer than those who are not.
Most people in retirement have accumulated a lot of equity in their home. They have generally repaid their mortgage by the time they retire – only 14% do not. However, many people have limited pension income, perhaps the state pension and one or two small work related pensions. This can mean that they count as rich because of the house, but feel poor because they struggle to survive on their income. The situation worsens as health deteriorates, because it is hard to meet the cost of care from already limited means.
The costs of care may start with small home adjustments such as walk in baths or extra handrails, increase with the need for carers to visit the home, and end up with extremely expensive care home costs which can be up to £1,750 per week. So people find their income is under pressure, and eventually care costs far outstrip their ability to pay out of their pensions. For some people all or part of the costs may be met by Social Services or through the NHS, but many people have to fund all or part of their care costs. We cover the usual things like claiming the correct rate of attendance allowance and ensuring that people have their Local Authority Assessment of Needs done to identify and help or need which can be sourced from various departments in the Local Authority. With the cutbacks in Local Authority spending on care, many people who used to qualify for help cannot get any help now. But they still need help. So what do they do?
One option for raising the necessary funds is to use the housing equity by taking an ‘equity release’ mortgage. This can seem complicated at first sight, and advice should be sought from a suitably qualified financial adviser. Having released capital from your property, you then have the funds to arrange the care you need. You retain your independence and control your future, and most importantly you can remain in your own home.
You should ensure that the adviser is able to advise on both mortgages (holds CeMAP or Cert CII MP) and equity release, also known as lifetime mortgages (holds CeRER or Cert CII ER). They should also have the specialist long term care qualification (holds CertLTCP or CF7). This is because you should consider all options available to you and the associated risks. If an adviser is a member of SOLLA, the Society of Later Life Advisers, then you can assume that they are suitably qualified. The National Careline is an associate member of SOLLA.
What is equity release and how can it be used to fund my care?
There are four generic ways to borrow money secured on your property for long term care:
- Firstly, there is the traditional mortgage. These are usually the cheapest source of borrowing, but many lenders have upper age limits between 70 and 85 by which time the mortgage has to be repaid.
- The second method is to take a retirement interest-only mortgage (a “RIO”) which generally have a very high, or no, upper age limit. They also do not require repayment of capital during the term of the mortgage. You pay only the interest, which means the loan does not increase during the term, and your equity is not depleted by accumulated interest. They are more expensive than traditional mortgages, but you may be able to borrow more than is available under option three.
Thirdly there is a lifetime mortgage, which is generally the most expensive way of borrowing. These are designed for older people and come in several variants. Normally these mortgages roll up the interest and you do not have to pay anything. This allows you to continue to use your income as usual. The amount you can borrow is dependent on the age of the youngest borrower. The downside is that you are adding compound interest to your outstanding loan, i.e. interest plus interest on interest. This means that there will be significantly less to leave in your will to your chosen beneficiaries. A benefit of lifetime mortgages is that the amount owed can never exceed the value of the property, so your estate is protected. There are options to take a series of payments over time, to match your needs, rather than talking all the money at once, which reduces the overall cost.
How much can I borrow? Use our calculator
- The final way is not a mortgage at all. Under a home reversion scheme you sell all or part of your home to a third party, and take a lease allowing you to remain in the property. It is then sold when you move into long term care or on death. A spouse may continue to live in the property. The cost of this depends on the movement of house prices, and is therefore very uncertain. There are not many providers of these schemes, and they are not very common.
There are risks and pitfalls of each of these options, which your adviser will explain. In short you should be aware of the implications for Local Authority funding, inheritance tax, risks to other benefits, the interaction with the 12 week property disregard, other options such as downsizing, the interaction with pension death benefits, arrangement costs and high early redemption charges. Family issues are also important. The rights of spouses need to be part of your planning.
The property belongs to you, and how you use it is your affair. People don’t usually want to involve relatives or their children because they don’t want to be a burden on anyone. However, if you have a good relationship with your children it is usually best practice to involve them in the decision. It enables them to best support you, and means that there are no unpleasant surprises in future. You may leave a smaller inheritance for your children, but it is often the children who call to discuss their relative’s options. All they want is for them to be happy and, above all, safe in their own home.
Finding out more…
Equity release isn’t for everyone and it is important you find out the facts first. You need a specialist financial adviser, and the solicitor you use should be fully conversant with equity release as this will make the whole process smoother.