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Does Equity Release Affect Care Costs?

Equity release involves accessing the money that is locked up in your property and using it to fund your retirement. You can do this through either a lifetime mortgage or a home reversion.

If you have a home reversion, an equity release lender will buy a share of your home for less than the market value. You will then receive a lump sum of tax-free cash that you can spend on anything you want.

For the duration of the scheme, you will live in your property rent-free, but you will not be the homeowner.

A lifetime mortgage involves taking out a loan that does not need to be repaid while you are still alive. You will also live in your home for the rest of your life, but you will still be the official homeowner.

The funds that you release through a lifetime mortgage are also tax-free, but you will pay interest on the money indefinitely.

When you use an equity release product, you can choose to receive the money in regular instalments or all in one go.

This decision is yours to make, but we would advise you to consider things like what you want to spend your money on, what your spending habits are like, and whether you have any other sources of income e.g., a pension or savings.

Now that we’ve explained how equity release works, the big question is: does equity release affect care costs? The answer is yes, and we will explain why.

What are the Options For Later Life Care?

Before considering whether equity release affects care costs, you need to be aware of the different options for care, as the costs vary for each one.

1. Care Facilities

Firstly, you could opt to live in a permanent care facility, which would either be a nursing home or a residential care home in the UK (1). Some people have no other option but to do this, as they do not have family members who can care for them, and they cannot afford a live-in carer.

Others choose to do this as they need access to 24/7 care, and they may not necessarily get this if they were living with a family member.

Care homes can also be very social, which is an advantage for people who don’t enjoy spending most of their time on their own.

In terms of care home costs, it could cost around £621 per week to stay in a residential care home, and the figure is usually higher for nursing homes as they offer a higher level of care for people with serious conditions.

2. Home

Secondly, you could consider staying at home with a live-in carer or a family member caring for you (2). This would be beneficial if you had the money to afford it, and you felt that you would benefit from living in a familiar environment and still taking part in family life.

On the other hand, if you stay at home, you may be socialising less than you would in a care home. What’s more, if you have any serious conditions, a family member may not be equipped to care for you, so you would have to consider getting a live-in carer which would be more expensive.

Regarding cost, if a family member cares for you, it’s up to you how much money that would cost as you would only be paying for your bills, food, and any money you wanted to give to the family member for their time. However, a live-in carer would usually cost around £1460 per week.

How Can Equity Release Negatively Affect Care Costs?

It goes without saying that equity release can positively impact your financial situation as it gives you money you wouldn’t usually have access to.

However, it could be detrimental in some cases, so we want to outline why equity release may negatively affect care costs.

1. It Costs Money to Take Out Equity

Though you will end up with more money after taking out equity, it does cost money to do this in the first place. You will have to consider application fees, solicitor’s fees, advice fees, valuation fees, and various other costs.

This means that you are losing money that you would have been able to put towards care costs, so it is something to consider if you could use your pension or savings to fund your care instead.

That being said, if your equity loan is large enough, it would be worth it to release equity regardless of the fees that are involved, as they will usually amount to no more than £3000.

2. You May Be Tempted to Spend all of the Loan

If you release a lump sum and spend it all in a short space of time, you would be left with no equity release fees.

This isn’t a huge problem in the sense that you wouldn’t have to pay back the money anyway. However, it could have an impact on your care costs.

If you are left with no other form of income, you would struggle to fund your care. You may be entitled to free care costs as your income would be so low.

However, most people release a large amount of money through equity release, so it is unlikely that you would spend it all before you entered care. If you are concerned about money management, you could opt for monthly payments instead of a lump sum.

3. Equity Release Fees are Counted Towards Your Assets

If you take out equity from your property and keep the money, it is counted towards your assets. This means people with large loans will definitely not be considered for free or reduced care costs, which is something to keep in mind.

For example, if you are currently cash poor and you will soon need care, it may be better to hold off on equity release as you could access free care instead.

This all depends on how old you are, how much you could borrow through equity release, and which type of care you would want to have.

How Can Equity Release Positively Affect Care Costs?

Equity release can be a great way to fund care costs for people whose pension will not stretch that far, particularly during the current cost of living crisis (3). Here’s why.

1. You Can Spend the Loan on Anything You Want

With an equity loan, there is no pressure to spend the money on something in particular. This gives you the freedom to put all of your loan towards care costs, or to spend most of it on various other things and save a portion for care.

This also means that if you released equity years ago and saved some of the money, you could choose to spend it on care, even if that was never your intention to begin with.

2. You Can Save Up With Monthly Payments

With equity release, you can choose to receive your loan and monthly payments for the rest of your life.

This means that you could save up some money each month to eventually put towards care costs, without having to take out a lump sum at a later date, and not knowing how much money you would be left with.

This method is advisable for people who earn a lot of money through their pension, or people who have plenty of savings. If you are not able to supplement your equity funds with another source of income, a lump some may be preferable, as you need to ensure you have enough money to make ends meet each month.

3. You Can Request a Lump Sum

Some people prefer to take out a lump sum to cover their care costs. Most people do not end up spending their equity loan in full, so they are left with additional money that they can put towards living in a car home or employing a live-in carer.

If you do request a lump sum through equity release, this money is not taxed, so it may be a better way of raising money for retirement done taking out a traditional loan is.

What’s more, if you know anything about equity release, you will know that the funds do not have to be repaid. This means you can cover your care costs without worrying about getting into irreversible debt.

4. You May Be Able to Sell Your Home to Fund Your Care

Usually, the equity release scheme comes to an end when both homeowners have passed away. However, if you want to enter permanent care, you may be able to sell your home and exit the equity release scheme.

In this situation, the equity release lender would put your home up for sale, and take the amount of money that covers the funds you have borrowed. Normally, the rest of the money would go to your family.

However, if you have specified that you are entering a nursing home or a residential care home, many equity release providers will be willing to offer you some money towards your care, that they will take from the property sale.

What Happens If I Enter Permanent Care During My Equity Release Scheme?

As we have mentioned above, if you enter permanent care during your equity release scheme, your home will be sold and you may be entitled to some money for your care.

However, this only applies if your partner has already passed away or entered permanent care. This is because the equity release scheme only comes to an end when both homeowners have died or gone into long-term care.

If your partner is still alive and they released equity with you, they will be able to continue to live in your home.

In this situation, you would have to consider how you could fund your care costs. Some equity release consumers are lucky enough to have family members who are willing to move in with them and take care of them, or their partner may be in a position to take care of them.

What Happens If I Do Not Need Care?

If you are still in good health in your later years and you do not need care, you can continue to enjoy your equity release scheme without worrying about funding care in a residential care home, a nursing home, or your own home.

However, you do not know what the future holds, so you should always save up some of your equity funds in case you do need to spend them on care costs in the future.

If you never enter permanent care, you will remain on the equity release scheme for the duration of your life.

When you pass away, your family would have to inform the equity release provider. The provider would then sell your property after your family had moved all of your possessions out.

How to Release Equity Without Neglecting Future Care Costs

It is well known that equity release is a great way to boost your retirement income. Some people take this to mean that they can stop worrying about their finances completely after taking out equity.

However, you should always be keeping your future in mind when you make financial decisions, so here are some ways to release equity without neglecting your future care costs.

1. Choose a plan with downsizing protection

Many equity release plans include downsizing protection. This means that if the equity release consumer decides that they want to move to a property that is lower in value, they can do this without any financial penalties.

It is very important that you find an equity release scheme with downsizing protection if you believe you may want to move house in the future.

This is because not all arrangements allow you to move house without paying the fee, and this would interfere with any saving for your car.

With a downsizing protection plan, if you realise that you are struggling to fund your care, you can easily move into a new property with more affordable bills, or to a location where the cost of living is lower.

If you decide to do this, keep in mind that your loan amount will change.

If you move to a property that is lower in value, you may have to make a repayment to the equity release lender. On the other hand, if the new property is higher in value, you could be entitled to a larger loan.

2. Choose a repayment plan

Some equity release consumers avoid repayment plans as verified that the appeal of equity release is the fact that the money does not have to be repaid. However, repayment plans can be a great way of ensuring you still have money left over for your care costs.

This is because if you are repaying some of your loan or some of the interest each month, you will reverse some of the debt that you have got into, so you will be left with more money.

If the equity release lender sells your property as a result of you going into care, there will be more money available to you to fund this care.

3. Choose a drawdown plan

We sometimes recommend the drawdown lifetime mortgage to our customers who want to save money for that car costs. This is because the drawdown plan is the best of both worlds.

With the drawdown arrangement, you get a lump sum to begin with, but then the money is put into a cash reserve that you can use whenever you need to.

This means you are able to fund certain projects, such as home improvements, but you will always be left with money that you can dip into when you need it most, such as right before you enter care.

4. Choose a plan that allows for a live-in carer

Some equity release plans do not allow you to have anybody else living with you, which includes an employed carer. It would be very unfortunate if you took out equity and later realised that you were not entitled to have a living carer.

To ensure this does not happen to you, we recommend finding a plan that allows you to have a carer living with you. You may need help with this, so we advise you to speak to an equity release specialist who will be able to find the right plan for you.

5. Choose a plan with additional benefits

If you seek plans that offer additional benefits, you may be able to save more money through equity release than if you didn’t do this important research.

Perhaps the most obvious plan that offers additional benefits is the enhanced lifetime mortgage. It appeals to people who are older than the average equity release consumer, or who have certain disabilities that impact their day-to-day life.

Some examples of conditions that may allow homeowners to qualify for the enhanced lifetime mortgage are: Parkinson’s Disease, Multiple Sclerosis, high blood pressure, cardiac issues such as angina, and cancer.

You may also qualify if you smoke, if your BMI is in the unhealthy range, or if you had to stop working early due to poor health.

There are various benefits that come with an enhanced lifetime mortgage. Some of these include: having access to a large loan, being able to release a large lump sum, and having low-interest rates.

You may even be able to release more money for home improvements if you have a certain disability.

This can be an excellent way to make your home safe for retirement, which would be essential if you decided to stay at home in your later years rather than entering a care home.

All effects can impact how much money you will have for care in your later life, so we certainly recommend considering the enhanced arrangement if you are eligible.

6. Consider your entitlement to benefits

Aside from equity release schemes, there are other things you can do to increase your income in retirement and improve your chances of accessing high-quality care. One thing you can do is check whether you are entitled to means-tested state benefits (4).

If you are entitled to any benefits, this could be additional income that would help you in your later years. Sometimes, you have to stop claiming benefits if you release equity.

Please keep this in mind when you are considering care costs, as you will have to decide whether it would be more fruitful to continue to claim benefits, or to go ahead with equity release.

7. Make the most of government grants

There are also plenty of government grants available for people on a low income, or people above a certain age (5). Too many people are unaware of these grants, but if you do your research, you may be entitled to more money than you realised.

Simple things such as getting a free bus pass and a free TV licence can help you to budget better, as you will have more money available to pay the bills and save for things like care.

There are also large government schemes available to pensioners, such as the cold weather payment (6).

If you are receiving pension credit, you are entitled to this payment when the temperature hits zero degrees in the winter. This may help you to cope with the rising cost of energy.

If you are caring for your partner or they are caring for you, please also consider the carer’s allowance (7). It is true that this scheme is more beneficial for younger people, as you will get a reduced amount of money if you are receiving pension credit.

However, if you are receiving less money in your state pension when you are in your carers allowance, you can potentially apply to receive the full amount of carers allowance but you would get if you were below 65 years old.

Releasing Equity to Pay For Care Costs

Equity release can be used for a wide variety of reasons. The majority of equity release consumers put their loan towards paying off existing debts, including conventional mortgages, or simply paying the bills each month.

This may deter you from releasing equity to fund care costs, as you may feel as though the scheme is not designed for this.

However, we want to assure you that people release equity for many different reasons, including gifting money to loved ones, having home improvements, paying for holidays, and of course, funding care costs.

As you can release a large amount of money through equity release, you would not be restricted to spending all of your loan on care costs. This means you would be able to enjoy a comfortable retirement whilst also saving enough for your care.

Releasing equity to pay for care costs is a great way to put yourself in the same position as people who have been fortunate enough to save for their care, or who have received money from relatives along the way.

This is one reason that we love equity release — it is accessible to everyone. It does not matter whether you are on a very low income, whether you did not save enough for your pension, or whether your credit rating is bad.

Equity release levels the playing field for homeowners, so you will no longer have to worry about not accessing high-quality care in your old age.

In terms of the repercussions of taking up out equity in your later years, it is true that you will not be able to leave as much money to your family. If this is something you are concerned about, you should seek a plan with inheritance protection. This will allow you to reserve some of your equity funds for your family.

It is also important to note that equity release funds are tax-free, which includes inheritance tax. Some people even choose to release equity as a way of avoiding inheritance tax, as it reduces the value of your estate, which usually puts you under the threshold for inheritance tax.

This means that if you are concerned about your family not having enough money, you could gift them some money from your equity release, and they would not be taxed on this amount.

They would have to spend this money within the seven years before you passed away, as, after this period of time, the money would be liable for inheritance tax.

Why Use Equity Release Warehouse

There are many places you can go to find equity release advice, so why choose equity release warehouse?

We have all of the information you could possibly need about equity release on our website alone.

However, even better is the personal advice that our equity release specialists can offer you over the phone. They are trained in explaining equity release in a simple way, without neglecting to discuss the nuances of the scheme.

Another reason to consider equity release warehouse is that we offer an initial consultation that is completely free of charge. During this consultation, one of our specialists will ask you about your financial situation and your attitude to equity release.

If you are keen to get started as soon as you can, the specialist will explain how you can fill out an application form to an equity release lender in your area. They will also be able to help you select the right plan for you if you are still undecided.

On the other hand, if you are still unsure about whether equity release would be the best way to fund your care, our advisors would be more than happy to discuss the pros and cons of equity release compared to its alternatives.

Though our staff takes a hands-on approach, we also encourage you to take control of your equity release journey. To do this, get started with independent research as soon as you can. Our website is the perfect place to do this.

First, head to our free equity release calculator, where you can discover how much money you could release from your property. This will give you an idea as to how much money you could put towards your care costs, but make sure you keep in mind that there will be various fees involved with equity release.

Next, request a personalised quote from us. Though the equity release calculator has helped many of our clients in the past, a personalised quote is the best way to find out how equity release would impact on your financial situation, as it takes into account your personal information, rather than just your age, property type, and property value.

It would also be a good idea to browse our frequently asked questions, as we are bound to have answered most of your queries about equity release on there.

If anything on this page concerns you in terms of your eligibility for equity release, please get in touch with us, and we will be able to confirm whether you would qualify for an equity loan.

We are contactable from 8:00 AM to 8:00 PM every day of the week. If you are ready to discuss equity release, call us within these times.

Another option is to request a call back from us, and we will reach out to you as soon as we can. In the meantime, we hope that you enjoy browsing our website, and that it helps you to understand more about equity release compared to other options when it comes to funding your care in later life.

Ultimately, there is no right answer. It’s all about weighing up how each option would change your individual circumstances for better or worse.

References

[1] How to choose the right care in later life https://www.which.co.uk/reviews/later-life-care/article/how-to-choose-the-right-care-in-later-life-aJ8dj8M2eleu

[2] What are the main advantages and disadvantages of live in care? https://ukcareguide.co.uk/main-advantages-disadvantages-live-care/

[3] Using an equity reléase scheme to fund your care https://www.moneyhelper.org.uk/en/family-and-care/long-term-care/using-an-equity-release-scheme-to-fund-your-care

[4] Benefits calculators https://www.gov.uk/benefits-calculators

[5] Benefits and Grants Available for OAPs in 2022 https://householdquotes.co.uk/benefits-and-grants-for-oaps/

[6] Cold Weather Payment https://www.gov.uk/cold-weather-payment

[7] Carer’s Allowance https://www.gov.uk/carers-allowance