Manage Your Money Later In Life – Why Sharing Stocks Could Be An Option That Works For You.
Releasing equity has long been viewed as a last resort for those whose retirement income needs some top-up. Pictures of white-haired couples on beaches and cruise lines abound. While there are still many people who choose to take out a lifetime mortgage to finance travel and the trips of a lifetime, lifetime mortgages are increasingly being used as a tool to organize family finances across generations.
Figures compiled by the independent pension advisor Age Partnership for IMoney (full disclosure, they are also our trading partner) show that around 32 percent of lifetime mortgages were taken out between January and May 2021 to free up money for home improvement.
Another 27 percent took a lifetime mortgage to replace an existing mortgage, easing the burden on their income by removing the need – if not the right – to pay back monthly.
Interestingly, 13 percent of lifetime mortgages taken out between January and May of this year should be freeing up money for gifts. It might not seem very interesting, but if you look at what is actually going on under this number, you could make some general assumptions about why people are doing this.
The housing market is notoriously expensive and when rents are high, it is very difficult for the majority of young people to buy their first home. You could argue that long-term renting is a sensible and flexible alternative, but the entire UK financial system is designed to function on a home ownership basis.
Annuities are designed based on the premise that you will have paid back your mortgage by the time you retire. But more than a decade of rock bottom interest rates, weak wage inflation, the surge in the pre-financing crisis in mortgage-only loans and the failure of endowment insurance have shown how fragile this premise is.
Combine that with rampant house price growth and you have a nation totally dependent on real estate wealth. This creates another problem – fine when you have it, but financially ruining it when you don’t. What do lifelong tenants depend on to top up their pensions or pay for their care?
While this is not the only approach, it is interesting that older generations are passing fortunes on to middle-aged children and grandchildren in their twenties to use as stakes in the running.
A combination of the stamp duty and the very cheap mortgage and lifetime mortgage rates make this a not unreasonable financial decision. And assuming you still live seven years from the date the gift was made, that money is inheritance tax exempt, making this approach interesting for those who have a lot of equity tied up in their homes.
Andrew Morris, Senior Equity Release Advisor at Age Partnership, says that is why more and more people are choosing a lifetime mortgage.
“Many customers spent the lockdown thinking about their priorities and decided to release equity to help their loved ones, often in exchange for a down payment to buy a home,” he says.
“The flexibility of new stock plans and the low interest rates allow customers and their families to service the interest on the money released. At only 2.9 percent APR on a loan amount of £ 65,000, a repayment of £ 157 per month would keep the debt. This makes freeing up equity a very viable option for many homeowners. “
It won’t be right for everyone, but it is worth thinking about.