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Pension, children, care fees: how much can you count on your home to pay for?

A cartoon couple fill buckets labelled children's deposit, care home fees, pension from a tap in the side of their house - A Richard Allen
A cartoon couple fill buckets labelled children's deposit, care home fees, pension from a tap in the side of their house - A Richard Allen

Hundreds of thousands of older homeowners are already relying on their properties to keep them afloat throughout their retirement. And demand for “equity release” is growing.

Latest figures show that in the three months to June £514m property wealth was released by older homeowners, with an average loan size of around £30,000.

It is a “drop in the ocean”, however. Companies working in this field estimate that over-55s have £381bn in housing wealth available to release – and the figure could be higher.

In future the number of older borrowers will rise, experts say, as a new generation of retirees have less in the way of assets beside their property.


They will look to it to top up a pension income, as well to help children and grandchildren buy their own property.

There will be other calls on the equity in homes too: clearing mortgages, for example, or paying care fees. That’s before luxuries such as replacing cars or travelling the world.

Helping children buy homes

According to insurer Aviva, one of many firms jostling into the “equity release” space, over-45s have around £25,000 earmarked to help a younger relative onto the property ladder.

This sum could end up needing to be far higher, depending on where and when the child is hoping to buy.

Simon Collins, of mortgage broker John Charcol, said that many people made plans for their retirement without taking into account the effects of inflation and house price rises.

“It’s very easy if you live in the regions not to realise how expensive cities such as London and Manchester have become,” he said.

For a child buying the average first-timer property in London, a 10pc deposit would be £38,000 – and that’s before taking into account tax and lawyers’ fees.

However, outside London, the amount required would be much less, with a first property costing on average just £170,000.

You’ll live longer than expected

Experts say many retirees underestimate their lifespans. They might budget for 15 or 20 years of retirement, but in reality are likely to live much longer.

Men’s life expectancy has increased by ten years in the past half century and women’s by eight years.

According to investment company Royal London, a man reaching age 65 in 2015 has a 17pc chance of living to age 100 – a retirement of over 30 years.

But rising house prices and declining work pensions mean younger generations – including those now in their forties – can afford to save far less toward retirement.

According to Aviva the average outstanding mortgage debt at 45 was £85,634, and one third of people expected to continue to repay this into retirement.

Separate research by equity release company OneFamily found that those aged 55 and over think they will spend £23,773 a year in retirement.

The average income of a retired single household in 2016 is £15,800 – leaving an £8,000 gap, which many plan to plug, somehow, by tapping in to property.

Over 20 years of retirement this cost would build up to £160,000. Over 30 years it would be £240,000.

Crunching the numbers

First, assume the retiree owns a £264,402 property, a figure calculated by Aviva to be the average value of an over-45’s home.

At 65 there is £30,000 left of mortgage debt to clear, and this theoretical couple will want to spend £25,000 on helping a child buy a property.

If they then require £160,000 to plug the gap in their income, this leaves £49,400 for emergencies, holidays, luxuries and to leave as inheritance.

If one or both were to live for another five years, this would be completely wiped out.

And it would be spent in 18 months by care home fees, with these factored in at £30,000 a year.

Mr Collins added that many people also don’t plan for unexpected life events such as divorce or illness.

“People might well need to end up doing work to the property or perhaps health issues creep in and they want to have a good time before they lose their health.

"Divorce is also becoming even more of an issue for people in their 60s or 70s.

“People also underestimate how much certain moves, or other life events may be. Quite often we raise some money for them from their property, and then they come back later and need more.”

The hope for both lenders and homeowners is that over time the value of their properties will continue to rise.

If the reverse happens, there are difficulties for all parties.

In this hypothetical scenario if our borrowers’ home were to fall in value by 10pc, that would wipe another £30,000 off the leftover cash.

How to extract the money?

The way property wealth is extracted from property in later life can also make a big difference to what equity is left.

That is because there is a big difference in costs according to how money is taken.

Downsizing from a property worth £264,402 to one worth £150,000 would free up around £110,000 after moving costs, tax and fees have been paid.

For wealthier downsizers, stamp duty on the new property becomes a major disincentive.

It encourages many to stay where they are and borrow against their home instead. Other forms of equity release can also be offputtingly costly, however.

“Lifetime mortgages” from insurers or equity release companies offer pensioners the ability to stay put, and extract this extra cash from their home.

At a glance | Lifetime mortgage
At a glance | Lifetime mortgage

They usually don't pay any interest, but allow this to roll up with the capital loan to be cleared on their death or if they move sooner.

You are limited by age as to how much of your property’s value you can borrow.

A 65-year-old owner of a £264,402 property would be able to release around £80,000, for example.

But he or she might well pay an interest rate of 5pc on the loan, and would have to pay off any outstanding mortgage debt at the same time as they take on the extra borrowing.

With interest compounding yearly, the total debt on this loan would be £212,000 after 20 years – almost totally wiping out the value of the property (unless it too rose substantially).

Harpenden Building Society and Hodge Lifetime both have loans specifically designed for older borrowers which are much cheaper than equity release.

Here the interest could be paid, for example, by children.

Other solutions to the dilemma

More pensioners are staying in work past the age of 65 than previously, according to figures released last month by the Government. Over 10pc of over-65s, or 1.1m people, were in work last year.

But this won’t be an option for everyone.

As an alternative some pensioners who need ready cash may also be tempted to transfer out of lucrative defined benefit pension schemes, warned Marcus Fink, pensions partner at law firm Ashurst.

“Some people will see a shortage of retirement income as a choice between equity release and a defined benefit transfer – and both options could end up being very expensive in the long run,” he said.

Find out more about Telegraph Equity Release and our partners Key Retirement. Get all the facts and best rates here or call 0808 252 9087>>

Reader Service: Interested in mortgages for the over-60s? Check if you are eligible for a lifetime mortgage with a free equity release calculator