Improve your retirement through your mortgage

David Forsdyke, our Later Life Finance expert, explains how your property wealth can be used to improve your standard of living in retirement.

Consumers are not saving enough to maintain their living standards in retirement according to The Financial Conduct Authority's (FCA) ‘Sector Views’ publication in February. The FCA has expressed concerns over inadequate savings and the removal of defined benefit pension schemes. This means many people could find themselves short of money when entering retirement.

We are seeing Later Life Finance play an increasingly important role for retiring home owners who have not saved enough into their pensions and other investments. Many are turning to the wealth built up in their property to top up their income. Borrowing sensibly can help them achieve the standard of living they want, so they can enjoy their retirement rather than struggle with it. But how does it work?

Well, there are two approaches worth considering here:

1. Borrow a lump sum and have a tidy up.

With a Lifetime Mortgage you can borrow a single lump sum and then allow the interest to roll up on top of the debt. This lump sum can be used to repay an existing mortgage or other debts, which in turn improves your income as it removes the need to make monthly payments on these debts. Allowing interest to roll up may make these debts more expensive in the long run, but for some this is a small price to pay for improving their monthly cash flow and therefore enjoying a better retirement. Since we launched our Later Life Finance service 43% of our clients* have raised a lump sum to repay existing mortgages or other debts.

Another use of the lump sum is to make home improvements. This can really make a difference to someone’s standard or living. A new kitchen, new bathroom, or freshly refurbished and redecorated bedroom can make the home a much nicer place to be, and let’s face it our retirement probably means spending much more time at home. Such changes might even include some practical improvements, like widening doorways and adding ramps for wheelchair use, or adding a walk in shower with hand rails for when we feel more fragile on our feet. 9% of Knight Frank Later Life Finance clients* have used lump sums for home improvements, although we understand the number is significantly higher in the mainstream Equity Release market.

2. Create a Reserve, or ‘Drawdown’ facility, to replace missing income.

Most Lifetime Mortgage lenders now allow borrowers to create a reserve facility. This gives the borrower an amount of money they can draw from in the future. The number of drawdowns you can make each year might be limited, but with careful planning these can be used to top up your income or meet certain costs when they come along. For example, if you need an additional £20,000 each year on top of your pension income to maintain your current lifestyle, you could set up a reserve facility for £300,000 which would last for 15 years (15 X £20,000 = £300,000). Interest is not charged on what you borrow until you draw it down, so as long as you are careful, you won’t pay huge amounts of interest from the outset. It is important to remember that money taken in drawdown is not actually income, it is borrowing, so it is not subject to income tax. The amount you can have in reserve will depend on your age and the value of your property.

There is an increasing range of features and greater flexibility than ever before with Lifetime mortgages. If you would like to know more about how your property can improve your standard of living please get in touch.

David Forsdyke has been at the forefront of the Equity Release market for 15 years, including 6 years with the industry regulator (the FCA) and two years as a member of the Equity Release Council’s Standards Board. David leads the Later Life Team at Knight Frank Finance. For more information, visit our Borrowing Into Retirement pages.

*Later Life Finance Client Data is based on mortgage offers received and transactions completed by Knight Frank Finance between May 2019 and January 2020.