How your property can help you plan to pay care fees
It can be daunting thinking about how to fund the type of care you or one of your loved ones may need in the future, however there are some property options that you can look at to raise the funds required. There are also non-property options available, such as using income, savings and investments. Our Commercial Property Associate Solicitor, Ben Loosemore, explains how your property can help alleviate the burden of care funding.
As is always the case, please obtain independent financial advice when looking into the options below, as some may be more relevant than others depending on your or someone else’s individual circumstances.
If you are over 55, own a property over £70,000 and have nearly paid off your mortgage or been lucky enough to pay it off completely, then an equity release scheme is an option to consider.
There are two types of equity releases, a lifetime mortgage and a home reversion plan. Both will release money from your property and come with the advantage that they allow you to stay in your home so, if applicable, you can receive care services at home.
A lifetime mortgage works by the equity provider loaning you a fixed sum which is secured against your property. The loan is then re-paid when the owner passes, sells the property or permanently moves into a care home. Interest will accrue on the loan during its term, but the borrower will have the option of either making regular interest payments to keep the interest and end total lower or letting the interest roll-up and paying the full amount at the end of the mortgage.
With a home reversion plan, you will sell all or part of your home to the equity release provider at less than its market value. In return you will receive a cash lump sum and a rent-free lease, which usually allows you to say in your home for the rest of your life. Please note that with a home reversion plan, the age restriction is sometimes higher at 65 years old.
Although equity release schemes have many benefits, it does come with drawbacks such as it won’t allow you to release the full value in your property, you won’t be able to pass on the full value of your home to your beneficiaries after you pass, releasing equity may affect your means-tested benefits and unless you use the money to buy a care funding plan the money could run out leaving you having to find alternative ways of paying your care fees.
Renting your home
If your home is unoccupied, then renting it out is an option as it will allow you to use all or part of the rental income towards funding your care fees.
Renting your home may be preferable to a quick sale as it will prevent you from selling your property at a discount in order to achieve a quick sale or selling in poor market conditions. It also won’t mean any equity in your home is used and therefore limits the value that can be passed on to your beneficiaries.
There will be initial outlays connected with renting your home, such as marketing and management fees, making repairs or decorations to bring the property to a tenantable standard, tax liabilities etc. so this will need to be considered when thinking about this option. You could also experience tenant issues such as unpaid rent, damage, replacing fixtures etc.
Selling your home
This is a cleaner option than renting your home and allows you to release a large sum of money to cover your care costs. It also gives you the opportunity to consider downsizing or moving into rented accommodation if you wanted to receive care services whilst still being in a private dwelling.
Selling a house can sometimes be a lengthy process and in order to release the full value in your property it will depend upon market conditions and whether you can avoid a quick sale at a lower price. There may also be knock-on effects of selling your home if you have any means-tested benefits, because having a large sum of money in savings could mean you’re no longer eligible for certain benefits.
Deferred Payment Agreement
A deferred payment agreement is similar to a lifetime mortgage, but this time the agreement is with the local council whereby they could loan you up to 90% of your homes’ value in return for a charge being secured against your home at a fixed interest rate. The loan is repaid after you die and your home is sold.
In order to be eligible for a deferred payment agreement you must be living in a care home and the value of your assets (excluding your home) must be less than the upper means-test threshold, so the option isn’t available for everyone.
A deferred payment agreement will give you certainty about the cost of your care fees being deferred and how the debt will be repaid. It also has the benefit that the interest rate the local authority can charge is capped.
Some of the disadvantages with this option are that your care fees will have to be repaid by you or your estate, so there will be less inheritance to leave and interest is usually applied on a compound basis meaning you’ll pay interest on interest already incurred which could amount up. Also if house prices fall you could find yourself with less money to repay your care fees.