Using your home to pay for long term care
Long term care is a regular topic in the media these days as the health service is in the midst of a funding crisis in coping with the increasing demand for care due to our ever aging population and ever growing care costs.
If you have assets of more than £23,500 apart from your home you will not qualify for local authority support so you will have to consider how else to fund care costs. One way to do this is to use your home to fund the costs. There are essentially 3 ways to do this.
- Equity release.
- Home reversion plan.
- Deferred payment plan.
Let me briefly explain how each of these methods works.
If you are aged 55 or over and have little or no mortgage on your property you can borrow up to 60% of the value of your home. The amount you can borrow depends on your age and the value of the property. The older you are the more you can borrow. Some lenders will lend more if you have a poor past medical history. Typically people borrow 25% of their house value.
You may make regular repayments or simply let the interest accrue on your mortgage. Most people let the interest roll up. Make sure you choose a lender that offers a “no negative equity guarantee.” This means that even if you end up in negative equity, meaning your debt is greater than the value of your home, the lender will not make your estate pay the difference when you eventually die.
If you don’t like the idea of borrowing say 25% of the value of your home you may like to consider a Drawdown Equity Release mortgage instead. Under this type of lifetime mortgage you receive a monthly amount (a loan advance) instead of a large capital sum. This means that your debt only increases slowly and you only borrow what you currently need. 60% of Equity Release mortgages are now of the Drawdown kind so it has become the most popular form of equity release.
You have to repay the accrued interest and the loan when you go into a care home or when you die.
A major downside of equity release is the cost. Typically lenders will charge interest rates of 5%-6% p.a. which means that your debt could grow significantly if you were to live a long time and/or the value of your home were to fall. At an interest rate of 6% your debt will double approximately every 12 years or so!
Home reversion plan
Typically you have to be aged 60-65 to qualify for a home reversion plan.
Under this type of arrangement you sell all or part of your home to a home reversion provider. You will receive a lump sum or regular payments.
You have the right to live in the property rent free until you die or you go into a care home. You have to agree to maintain and insure the property.
The big disadvantage of a home reversion plan is that you will only receive between 20%-60% of the value of your home when you sell it to the provider.
Like equity release lenders, home reversion providers will give you a “no negative equity guarantee.”
Deferred Payment Plan
Deferred payment plans aren’t very well known but they have been available for a number of years. Such a plan is an arrangement with your local authority that allows property owners to use the value of their homes to pay for care home fees.
If you qualify your Council will pay your care fees on your behalf. You don’t have to personally pay your fees until you sell your home or until you die. The Council secures its debt by putting a charge on your property at Land Registry.
You can’t usually borrow more than 90% of the value of your home but in practice your local authority will set a limit of 70%-80%.
A deferred payment agreement will come into force after you have been in a care home for 12 weeks or more. That’s because the local authority has to pay for your care costs for the initial 12 weeks.
The good news is that local authorities will typically charge just 2% a year interest! That’s a fantastically low interest rate.
You should bear in mind that both equity release and home reversion plans have to be repaid by selling your home when you go into a care home. A deferred payment plan on the other hand only starts after you have already been in a care home for 12 weeks.
Another important point is that by taking out an equity release mortgage or a home reversion plan you may lose certain state benefits.
As ever it is vital that you take advice from a suitably qualified and experienced professional adviser. Your adviser should ideally be a Chartered or Certified Financial Planner, independent and a member of SOLLA, The Society of Later Life Advisers. Why a SOLLA member? Because SOLLA has the most stringent qualifications, relevant experience and assessment standards for its members and the highest ethical and moral standards for long term care advice in the UK today.
As yours truly has been a SOLLA member for 5 years and has recently been re-accredited for a further 5 years by SOLLA, I think you know who to contact for advice! So if you or someone you know needs advice please do get in touch. You know it makes sense.