Q I have turned 60 and own a property outright, which is worth approximately 350,000. I am self-employed but only earn about 10,000 a year. I have few savings but no debts.
I would like to raise about £50,000 of capital, possibly by remortgaging, to be repaid on my death. I do not want to sell the property to a company which then provides a fixed amount and owns the house on my demise. I have no close family, but I would like to leave some money to friends, relatives and charity. Could you advise me on the options? MW
A The cheapest way to raise £50,000 from your home would be to sell it and move somewhere costing £50,000 less than the price you receive for it. However, if you don’t want to move, taking out a £50,000 mortgage on your current home could be an option as, according to Moneyfacts, there are a (limited) number of lenders which offer mortgages on an interest-only basis and allow repayment of the loan upon the sale of the property (as would apply in your case).
However, your age and income could work against you in qualifying for this kind of mortgage, because you need to be able to show that you could afford the interest payments both now and into retirement (when your income is likely to fall). So even if you did succeed in getting a mortgage, you would end up using some of the £50,000 cash to foot the interest bill.
This would not be the case if you went down the equity release lifetime mortgage route. That is not to say there is no interest charged on an equity release lifetime mortgage, because there is. However, rather than paying the interest each month, it is rolled up and added to the money borrowed and is repaid when the property is sold on your death. The major downside of this is that the interest bill can add a significant amount to the size of the original loan, not least because interest is charged on the loan plus rolled up interest. Which? found that 10 years after taking out a lifetime mortgage of £40,000 with an average fixed interest rate of 6.9 per cent, the amount owed would have more than doubled to just over £80,000.
If you don’t actually need a large lump sum, you can reduce the cost of a lifetime mortgage by opting for a drawdown loan where, instead of taking a lump sum at the start of the loan, you borrow smaller amounts either as you need the cash or on a regular basis. Because you are taking smaller amounts over a period of time, the debt will grow more slowly and the interest charged will be less. But with either type of lifetime mortgage, on the sale of the property there will be a lot less left over for the people and charities you want to leave money to than there would be if you simply moved to a cheaper home.
The alternative to a lifetime mortgage would be to use a home reversion scheme. This is where you sell a proportion of your home to a reversion company which, when you die and the property is sold, gets that proportion of the sale proceeds. So if you sold 50% of your home, the reversion company would get 50 per cent of the money from the sale. There is no interest charged, but to raise £50,000 you would have to sell a lot more than a 15 per cent share (ie £50,000 as a percentage of £350,000) because the price paid by the reversion company is a lot less than its market value. This is because the price you are paid reflects the fact that you get the right to live in the property for the rest of your life. You can find out more about equity release on the Age UK website.
