Many people expect to downsize to help fund their retirement. This is often a reason they give for not needing to put money into a pension. However, in twenty years, I’ve only known two pensioners to downsize and release enough money to substantially improve their retirement. Of course, I’ve known dozens of pensioners move but they never actually release money doing it, in fact it often ends up costing them money. I’ve known people move to “nicer” areas, luxury apartments, bungalows or relocate to an expensive city to be closer to grandchildren. All of this means they end up moving to a property of similar value or often one that costs more.
A lifetime mortgage as part of a purchase is becoming an increasingly common way of facilitating this upsizing in retirement. Unlike a traditional mortgage the amount you can borrow is not dependent on your income, instead it is based on your age, the value of the property and interest rate you are willing to pay. The reason why income is not considered is that interest can be “rolled up” i.e. it is added to the loan. You can choose a lifetime mortgage that allows you to make interest or capital payments but if you miss payments they are added to the loan. Interest is then charged on interest which means the value of debt increases exponentially. With current rates, if you’re not making payments you can expect the balance to double every 15-20 years.
With a lifetime mortgage, the outstanding debt must be repaid on death, however any remaining equity can be passed on to your chosen beneficiaries. This compares to a lifetime lease, another popular way of upsizing, where the entire value of the property is forfeited on death. Providing you choose a mortgage with a “no negative equity guarantee” your estate will never have to pay back more than the value of the property. Some providers even offer “inheritance guarantees” where a certain amount is guaranteed to be available to pass on as inheritance, regardless of what has happened with house prices or the loan.
All of this means that upsizing is now a viable option for homeowning pensioners.