Dave Lewis, a retired car mechanic aged 72, became a widower a year ago. Subsequently, he has moved back to the area where he was brought up in Yorkshire. He is now settling into a new life pattern and spending a lot of time on his hobby which is maintaining his two classic cars. He has started a small business as a sideline renting out these cars for weddings and special occasions.
Dave, who has no dependants, is finding it increasingly difficult to maintain his new lifestyle on his current income. He spent £225,000 on his new freehold home and market prices have not changed over the past six months. He did not have a full structural survey prior to buying it and has now discovered that he needs to spend at least £15,000 on the electrics and plumbing. He would also like to refurbish the kitchen and bathroom which is estimated to cost £10,000 but which will increase its value to £250,000.
He purchased the property with the support of an interest only mortgage for £25,000 which is on a fixed interest rate for the next six months. He has a state pension of £4,200 which is supplemented by an annuity from his former private pension scheme provider of £5,250 pa. His business loses about £2,000 per annum, but as the cars are his main interest in life, he wishes to continue with it for as long as possible. His annual expenditure (excluding the cars) totals £8,500 and his mortgage payments are costing him £104 per month. The excess in the total expenditure over his income is being met by depleting savings and investments which have been reduced to £11,000 all of which are held in a cash and equity based ISA.
Dave wishes to have the ability to maintain his current lifestyle and fund the property improvements which must be made. On the recommendation of a friend, he has responded to an advertisement in a national newspaper from a firm offering specialist advice upon equity release. He has now informed an adviser at this firm of his financial position, and requested a summary of the options which are available.
He has however stressed that any solution must provide him with complete security of tenure. He has also told the adviser that he may at some time need to live closer to the town centre if he ever loses the ability to drive.
David is also concerned that an equity release based solution might reduce his flexibility particularly if it restricts him from raising further funds against his property in the future. In this regard, while Dave is confident that property prices will not fall over the medium to long term, he recognises that they are unlikely to continue rising above the rate of inflation.
David McLaughlin is director of TBO Investments
Dave is in a position where the implications of inheritance tax are not of concern given the size of his estate and the fact that there are no dependants. His immediate requirements are to fund the improvements on his home as well as maintaining his lifestyle. His principle asset is his home though there are savings which are being depleted.
Equity release is a viable option as this will enable him to get the lump sum to pay off the existing facility and fund the required improvements to his home. It will also increase his disposable income as there will no longer be the requirement to service the current mortgage, giving back £1,248 per annum.
There are equity release products which give both a lump sum and income. In this example, using Northern Rock's Cash Plus product, I would look to release 22% (£50,000) and receive 0.04% of the value of his home each month (£75) improving his income by an additional £900 per annum. This combined with the fact he has no mortgage to pay will offset the losses from running his cars as well as stop him eating into his valuable savings and allow him to maintain his lifestyle.
More importantly, he still has the security of tenure with the right to remain in his home for the rest of his life as well as the option to transfer the equity release facility to another property in the future should he decide to move closer to town. He will also be able to release additional funds in the future as the value of his property increases and he gets older.
Norma Haynes is a financial planning technician at Lucas Fettes and Partners
Dave does not qualify for state benefits to assist with income. Quotations for repairs and upgrades are essential, as they form the basis for capital needs. Mortgage style 'equity release' products provide capital (or income) based on a percentage of the property value - and either require him to make mortgage payments or roll up the debt. An alternative 'home reversion' style product is available whereby a percentage of his home (up to 100%) is sold for a given discounted value.
Dave needs an illustrative £25,000 for repairs and improvements and has a £25,000 mortgage to which he finds it difficult to meet payments without depleting savings. It may be appropriate for him to consider 'home reversion' schemes whereby a percentage of his home is sold to raise a capital lump sum, ideally to clear the full £50,000.00. This releases £104 per month as additional disposable income, incurs no future mortgage payments and retains a known residual personal equity value as property values increase. Any additional monies raised could be invested to provide tax free or tax deferred income.
This scheme will give him security of tenure, the option to raise additional funds at a future date and have the potential to sell and move home. The percentage of his home sold under home reversion would need to be re-paid to the provider on sale or death. If property values have depreciated, or the total percentage eventually sold becomes large in proportion to the overall market value, Dave may not be able to afford a suitable alternative home (plus associated moving costs) at a later date.
Dave should investigate any penalties within the fixed term mortgage, which may include an extended 'lock in'. Those costs, plus home reversion set up costs, should be taken into account when setting the initial total capital requirement.
Future World funds
Square Mile’s series of informal interviews
Achievements, charity work and other happy snippets
Latest news and analysis
When is a refund allowed?