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