For many of those contemplating an equity release plan, leaving an inheritance for their beneficiaries is one of their main concerns. Although the interest that accrues on the cash freed up from this exercise is, in almost all circumstances, not payable until after death, it can potentially swallow the entire value of a property.
This is one of the reasons why it is essential for anyone considering equity release as a way of funding their retirement to seek expert advice and also involve the people this will eventually impact on – the family. Leaving an inheritance is something that many of us wish to do and, equally, that many of us might hope to benefit from. This hope can be founded on the sometimes rocky shores of equity release products. Although the interest rates applied to equity release schemes can be fixed for the life of the product, they are higher than the rates charged on typical mortgages.
However, fixed rates do offer some benefits however for anyone concerned over leaving an inheritance. Fixed interest rates offer certainty, certainty of what the future balance will be. The only uncertainty is what the eventual sale price of the property will be. The difference between the two figures goes part way towards the final inheritance total.
There are, however, ways to reduce the impact of the roll-up of interest and so increase the chances of leaving an equity release inheritance. For a start, some equity release products called drawdown lifetime mortgages, enable cash to be withdrawn in stages, rather than as a single lump sum. This has the immediate effect of reducing the interest accrual. Amounts can be taken in as small amounts as £1,000 a time and at whatever frequency you require with no further administration charges.
It may also be possible to make monthly interest payments, as with a standard mortgage and repay the interest charged each month, or year. With new voluntary payment plans from the likes of Retirement Advantage, you can repay upto 12.5% of the original amount borrowed each year with no penalty.
Therefore, these new style equity release schemes can actually leave you with a choice of how to manage your inheritance, by way of managing the scheme like you would any normal mortgage. It is also worth noting that equity release can be of benefit when it comes to inheritance tax planning, particular where high value estates are concerned. The taxable value of an estate is reduced any release of equity because the outstanding interest has first charge on that estate. Inheritance tax is levied only once that interest has been paid i.e. the net estate value. Finally, those worried that equity release inheritance issues will make the whole idea a non-starter may find reassurance in the fact that most providers have strict borrowing limits. For example, for a single person at age 65, Aviva would release upto 30% of a property’s market value. These figures are actuarially calculated to ensure that there is little likelihood that the debt should ever reach the value of their property.
