‘Should we bor­row to fix up £1.7m home?’

The Daily Telegraph - Your Money - - MONEY MAKEOVER -

This cou­ple want to know if eq­uity re­lease is the an­swer. Amelia Mur­ray finds out

Jet-set­ting grand­par­ents Su­san and Michael Kerr are show­ing no signs of slow­ing down but are mind­ful of hav­ing enough money to fund their plans. The cou­ple have trav­elled ex­ten­sively and want to con­tinue to do so. Mr Kerr, 83, said they are plan­ning a visit to the United States this year, where Mrs Kerr, 71, was born.

De­spite be­ing “fit and fine”, the cou­ple had a scare last year when Mr Kerr caught sal­mo­nella while in Berlin and be­came “very weak” for months.

The in­ci­dent made the Kerrs re­alise that they wanted an ac­ces­si­ble bath­room and walk-in shower in their home. Their plan is to adapt the ground floor of their £1.65m house in Chiswick, west London, which they own, mort­gage-free.

They are also look­ing at con­vert­ing their small garage into a stu­dio, and buy­ing an “Amer­i­can fridge”, a dream of Mr Kerr’s. In to­tal, the project will cost £30,000.

To fund it, should they con­sider eq­uity re­lease, or is dip­ping into their in­vest­ments a bet­ter op­tion?

Both have Isa port­fo­lios. Mr Kerr has £153,800 and Mrs Kerr £32,400.

Mrs Kerr also has £19,800 in cash Isas and £4,500 in other sav­ings, while Mr Kerr has £11,000 in cash. They have an­other £1,700 in a joint ac­count.

Mr Kerr’s an­nual pen­sion in­come is £41,177, the bulk of this is from his BBC pen­sion, which pays £26,551 a year. Mrs Kerr gets £13,306 a year from her pen­sions. The cou­ple’s in­vest­ments yield £4,934 a year. They have ad­di­tional in­come from lodgers, who live up­stairs in the house and pay £940 a month.

Last year, the Kerrs’ to­tal house­hold in­come was £67,000. They be­lieve an an­nual in­come of £60,000 is suf­fi­cient to travel, re­place their cars in the fu­ture and cover unan­tic­i­pated house­hold re­pairs. There is noth­ing wrong with eq­uity re­lease, in the right cir­cum­stances. How­ever, it is the last card that should be played, rather than one of the first.

It is fair to say that the Kerrs have an im­bal­ance of as­sets from the illiq­uid prop­erty value to the much more liq­uid cash. This is a mat­ter that would be of much greater con­cern should any­thing hap­pen to Mr Kerr, as the cou­ple rely to a greater ex­tent on his pen­sions as the main source of in­come.

Typ­i­cally the BBC scheme in­cludes a widow’s pen­sion of 50pc. How­ever, they should check.

I would be in­clined to leave eq­uity re­lease as an op­tion in the fu­ture if Mr Kerr were no longer here, or for po­ten­tial care costs.

Eq­uity re­lease can be ex­pen­sive and could tie the cou­ple into an ar­range­ment that might prove to be in­flex­i­ble and dif­fi­cult in the fu­ture.

For now, I would sug­gest that the cou­ple use Mr Kerr’s Isa to fund the home im­prove­ments and leave the cash where it is.

A down­side of us­ing Isa money is that it will re­move that sum from the tax-free wrap­per.

How­ever, the main dis­ad­van­tage is that they are us­ing cap­i­tal that Mrs Kerr might need to sup­ple­ment her in­come in the fu­ture.

I would sug­gest that the cou­ple make sure that the in­vest­ment-based Isas are per­form­ing well and that they are grow­ing in line with a rea­son­able bench­mark.

These in­vest­ments are ab­so­lutely es­sen­tial for the Kerrs’ fi­nan­cial fu­ture. There­fore it is cru­cial that they are man­aged ef­fec­tively and re­flect the level of risk they can com­fort­ably tol­er­ate.

In­her­i­tance is some­thing the cou­ple do need to con­sider, as their ben­e­fi­cia­ries are likely to be pay­ing sub­stan­tial in­her­i­tance tax. This is a com­plex case with a num­ber of re­quire­ments that need ad­dress­ing: im­me­di­ate cash re­quire­ments, in­her­i­tance tax plan­ning and pos­si­ble care pro­vi­sion.

While it’s a long shot, they should speak to their lo­cal au­thor­ity to see if there are any grants avail­able for mak­ing the adap­ta­tions re­quired for a walk-in shower for Mr Kerr, as this would be down to mo­bil­ity prob­lems.

The Kerrs should also in­quire if there are any penal­ties for cash­ing in their Isas. Re­gard­less of the out­come, it is likely they would be bet­ter us­ing this money be­fore eq­uity re­lease.

The av­er­age in­ter­est rate for a life­time mort­gage, a pop­u­lar type of eq­uity re­lease, is cur­rently around 5.66pc.

It is pos­si­ble to get lower rates, even be­tween 3pc and 4pc. How­ever, this will de­pend on the Kerrs’ ex­act cir­cum­stances.

If we take the cur­rent av­er­age rate over 10 years for a £30,000 life­time mort­gage, if no re­pay­ments are made, this will amount to ap­prox­i­mately £52,026.

This will con­tinue to com­pound un­til the life­time mort­gage comes to an end, usu­ally ei­ther at death or when the last part­ner moves into long-term care.

Cur­rently, they have more than their re­quired £60,000 an­nual in­come, so us­ing some of their sav­ings to pay for their home im­prove­ments makes senses.

At a later stage, the cou­ple may opt for a loan with in­ter­est paid monthly or a life­time mort­gage with a draw­down re­serve fa­cil­ity, with the abil­ity to make ir­reg­u­lar pay­ments on a vol­un­tary ba­sis. This is gen­er­ally 10pc of the orig­i­nal loan each year.

This would al­low them to re­lease money to pay for any care re­quired, but also sup­ple­ment in­come.

The re­serve fa­cil­ity would al­low them ac­cess to fur­ther funds in the event of un­fore­seen ex­pen­di­ture.

In the event of death, some life­time mort­gages would en­able the re­main­ing per­son to down­size with­out any early re­demp­tion penal­ties, while some al­low this in the event of both mov­ing house.

An­other point to con­sider if they use eq­uity re­lease, now or in the fu­ture, is that not all life­time mort­gage lenders al­low lodgers.

This may re­strict the range of plans avail­able and would hit in­come.

‘Eq­uity re­lease is the last card that should be played, rather than one of the first’

Su­san and Michael Kerr want to have a £60,000 in­come to con­tinue trav­el­ling

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