Blog Post

Baby boomers' equity release borrowing endangers inheritance: use these three tricks to beat the system

Sam Meadows • Aug 26, 2018

Those taking advantage of the soaring value of their homes are getting younger, increasing the risk for lenders, the Bank of England has warned.

The number of people using equity release, a type of mortgage for older borrowers, grew by 40pc year-on-year in 2017, with a record £3bn borrowed , according to the advisers Key Retirement.

Also known as lifetime mortgages, equity release plans allow those over the age of 55 to borrow against their home. There are no monthly repayments and instead the interest rolls up on a compound basis, with the loan being repaid when the borrower dies or sells the house. The total debt cannot exceed the value of the home.

But according to David Rule, an insurance regulator, 15pc of equity release cash went to those under the age of 65 last year – up from 7pc in 2015.


This creates a risk for lenders, he says, as with longer lifespans the chances of the debt growing to exceed the total value of the home are greatly increased.

For the borrower this risk, combined with comparatively high interest rates, raises the danger that any nest egg you had planned to leave your children could be swallowed up by repayments. Married couples can pass on £900,000 (£1m by 2020) without becoming liable to inheritance tax of 40pc.

Thankfully, with careful planning and using one of these tactics, you can mitigate this risk and make sure your descendants won’t be left with nothing.

1. Boost your home’s value by renovating

The vast majority of people using equity release – around 60pc according to Key Retirement – do so for home renovations. Major provider Legal & General last week announced an extension of its trial “property refurbishment” equity release plan from London to several more towns and cities.

The plan differs from other lifetime mortgages in that the amount you can borrow is determined by the projected value of the home after work is finished. This is a response to the number of “equity rich” pensioners living in homes in need of urgent repair, according to L&G.

It is possible to use equity release for renovation to boost the size of the estate you pass on to your children, rather than deplete it.

According to calculations by Laterliving Now, the advisers, someone who used a lifetime mortgage and added sufficient value to their home by renovating could have a greater estate to pass on.

The interest rolls up so a borrower who withdrew £100,000 at a rate of 5pc (a current average rate) would need to repay £162,906 if they lived for another 10 years.



If someone with a home worth £400,000 borrowed £100,000 at 5pc to renovate and add £200,000 to the value of their property – this would be a major project but not unreasonable in some parts of the country – they could have £437,000 to leave to their descendants after the house is sold and loan cleared. This means an additional £37,000.

If property prices grow this figure could be even higher. The risk is that the borrower lives for longer than expected meaning more of the value is swallowed up in repayment.

Simon Chalk, of Laterliving Now, said: “When we receive queries from customers by far the most common reason for them wanting equity release is home improvement, or at least maintenance.”

2. Choose a plan which protects value

Another option is to shield a portion of your home’s value from your equity release lender, which can then be passed on to your descendants.

Many providers now offer plans with “inheritance protection”. If your home is worth £500,000 a typical maximum for equity release borrowing would be 35pc, or £175,000. Inheritance protection plans would allow you to release half of that amount, while making only half of the value of your property liable for the repayment.

This would mean you would have a guaranteed £250,000 to pass on when you die. The amount which is protected depends on the amount of available money you draw on.

Dean Mirfin, of Key Retirement, said: “There are a lot of these plans around now, it’s not necessarily a niche option.

“The principle for the lender is the value of your home and possibility for further growth means they’re not taking any more risk than regular equity release, so the rates aren’t usually higher.”

This method could also take someone who is close to the IHT margin below the taxable threshold, if it brings the value of their whole estate at death below £900,000.

3. Use equity release ‘gifts’ to avoid IHT

Those in good health could actually use equity release to lessen their “death tax” blow. Any financial gifts bestowed upon your descendants will not be taxable if you live for seven years.

If you have a valuable asset in the form of your home and little in the way of spare cash, a lifetime mortgage could allow you to support a grandchild in need of a housing deposit or clear the mortgage of your son or daughter now, and avoid inheritance tax later. One in four people who use equity release give all or some of the money to younger family members, according to Key Retirement.

This is a risky strategy, however. If you were to die before the seven-year time limit expires, that gift would be taxable at 40pc, saddling the recipient with an unexpected tax bill. This is assuming your estate exceeds the IHT threshold.

Another risk is that the IHT saving is wiped out by the cost of interest on the lifetime mortgage. As you will have lived for seven years, with the interest rolling up throughout, this is a possibility depending on the size of the gift.

Mr Mirfin said: “Fifty years ago people tended to inherit in their 50s. Now people are living so much longer that it’s common to inherit in your 60s, or even older.

“Lots of people are choosing to give their money away now. Doing it this way also allows you to have some control over how it’s spent, so you could give the money to a granddaughter on the provision it’s spent on a house deposit. You can’t do that when you’re dead.”

Fact or Fiction - Equity Release Myths

08 Dec, 2022
We try to give you the facts

Rising Equity Release Rates & Roll Up of Debt Concerns

by Ian Holmes • 21 Oct, 2022
The increase in equity release pricing is raising concern with rolling-up debt hitting the property value faster

One in five landlords consider selling up over energy efficiency changes

by Ian Holmes • 15 Oct, 2022
Landlords could face bills of up to £10,000 per property under new EPC proposals

Landlords: What You Need to Know About the New EPC Regulations

27 Jun, 2022
How will the change affect you?

Annual House Prices Cool in July

04 Aug, 2021
but still remains in double digits

Tenants in Common

04 Aug, 2021
What is Tenants in Common?

Financial Conduct Authority proposes temporary financial relief for customers

by Ian Holmes • 02 Apr, 2020
The Financial Conduct Authority has today (02/04/2020) proposed a range of new measures to support households facing sudden financial hardship as result of the coronavirus, including three-month payment freezes on loans and credit card debt. The package, intended to complement relief already announced by government to support mortgage holders, furloughed staff, renters and the self-employed, also includes pledges to slash interest rates on arranged overdrafts up to 500 pounds to zero, for up to three months. The FCA, which supervises banks and credit providers across Britain also said consumers using any of these temporary measures should not see their credit rating affected. It also said it would ensure all overdraft customers were no worse off on price when compared to prices they were charged before recent overdraft changes came into force.

Nationwide Reintroduces Tracker Mortgages

by Ian Holmes • 24 Mar, 2020
Nationwide Building Society has brought back its two-year residential tracker mortgages just days after the product was withdrawn from its offering. The mortgages will go live on 25 March, with house purchase and first-time buyer products starting from a rate of 1.39 per cent and remortgages from 1.19 per cent. The products will cover a range of loan to value tiers and come with both £0 and £999 fee options. Henry Jordan, director of mortgages at Nationwide, said the society took the “prudent decision” to consider the impact of the two interest rate cuts on its range. “We are re-introducing two-year trackers to our mortgage range to enable us to offer products with flexibility and no early repayment charges,” he said. Rate reduction Nationwide has also announced it will pass on a further 0.15 per cent rate reduction to existing variable rate borrowers to reflect the cuts made to the Bank of England bank rate. This follows on from the society confirming it would pass on the initial 0.50 per cent reduction to borrowers from 1 April. With the bank rate now at a record low of 0.10 per cent, Nationwide’s base mortgage rate (BMR) and standard mortgage rate (SMR) will reduce by an additional 0.15 per cent to 2.10 per cent and 3.59 per cent respectively, with these new rates coming into effect on 15 April. Borrowers on an existing tracker rate mortgage will also see their rates reduce by a further 0.15 per cent. Jordan added: “With a second cut in interest rates in just over a week, it is important that borrowers have clarity about what this second change means for them and the future interest and payments on their mortgages. “By passing on this latest rate reduction in full, from 15 April, we hope to minimise mortgage costs for our members during this difficult period.” Earlier, the society closed its dedicated broker support line as a result of government advice surrounding coronavirus. Jordan added: “While we continue to work hard with valuation and conveyancing partners to progress applications, we ask members and brokers to bear with us during what is an unprecedented period.”

Barclays Mortgage Rescue Plan

by Ian Holmes • 18 Mar, 2020
Following chancellor Rishi Sunak’s announcement that mortgage lenders would offer a three month holiday on repayments, the bank has confirmed it will offer other rescue measures, as well at the 90 day break, depending on the borrowers’ needs. The bank said it would consider switching borrowers from capital repayment to interest-only for up to 12 months. Further measures to help borrowers include an extension of the mortgage term to lower payments, and the availability of short and long term repayment plans for missed mortgage payments. Borrowers who think they will face financial difficulty are being told to contact the bank to speak to one of its specialist support teams to discuss their options. A Barclays spokesperson said: “As a responsible lender, it is crucial that we offer the right support to our customers at this time. “We have therefore decided to offer customers who are potentially facing financial difficulty, a number of options to support them through this time.” Before the chancellor’s address to the nation yesterday evening, Mortgage Solutions reported Lloyds Banking Group had pledged not to charge borrowers fees on missed mortgage payments. That bank, along with NatWest, Nationwide and Barclays, have all confirmed taking a payment holiday will not leave a black mark on borrowers’ credit profiles.

Annual house prices see weakest growth in six years

by Ian Holmes • 25 Feb, 2020
This was below than 2018’s annual increase of 3.3 per cent, and weaker than the 2.6 per cent growth seen in 2013. All regions saw a drop in growth; England’s prices increased one per cent compared to 2018’s three per cent and prices in Scotland grew 1.8 per cent compared to 4.6 per cent the year before. In Wales, a four per cent growth was seen, down from 2018’s 4.8 per cent and Northern Ireland saw house prices rise by 3.5 per cent. This was a slowdown from the region’s 4.6 per cent rise in 2018. Local changes Locally, the strongest growth was seen in North Devon, where the average price of a house rose 8.9 per cent to £247,590. Three of the top five local areas to see strong growth were in Wales. Land Registry attributed this to the removal of the Severn Bridge tolls making it more affordable for those who work in Bristol to live on the Welsh side of the River Severn. The biggest falls occurred in Kensington and Chelsea, where the average house price dropped 7.7 per cent to £1,256,713. Four of the five local areas which saw the weakest growth were in London and the South East. Land Registry said this followed a “general slowdown” in the London property market since mid-2016 and was probably due to the area being “disproportionately affected by regulatory and tax changes”.
Show More
Share by: