Lifetime Mortgages
In a previous blog we touched on how much you might need to accumulate to achieve financial independence. More recently we explored the concept of human capital and how leveraging it can lead to financial success for many individuals (and they can retire comfortably and stay comfortably retired).
However, there are situations where often through no fault of their own people get to the end of their career and haven’t been able to build up a sufficient level of financial assets to retire and continue to enjoy the same standard of living they did whilst working. A relatively recent addition to the Irish market has been lifetime mortgages. A lifetime mortgage effectively allows people to draw some of the equity from their house to use for their retirement. This might be to repay the balance on a mortgage, supplement financial assets, future proof the house, have a protective fund in retirement and even gifting to kids. This is best illustrated by way of an example:
- Client has a property worth €2m
- Client has a gap in their retirement assets of €200,000
- Client is aged 60 and we will assume a 25 year life expectancy
- Property growth is assumed at 2.5% per annum
- CAT thresholds increase by 2.5%
- They have 3 adult children
If we assume the assets of the estate are just the property, the couple are already over the current group 1 threshold for 3 kids (€1.2m). With and without a lifetime mortgage scenarios are detailed below at age 85 (25 years):
No Lifetime Mortgage
- Estate value €3,700,000
- After tax estate value (assume group 1 * 3) €3,218,500
With Lifetime Mortgage
- Estate value pre loan €3,708,000
- Estate value post loan €2,696,000
- After tax estate value €2,540,500
As you can see the capital acquisitions tax savings does some of the heavy lifting on the cost of this. Effectively, Jack Chambers will pay for some of the loan/ interest. One of the reasons this has a lot of practical application in Ireland is that it is actually quite hard to trade down due to the lack of suitable properties. Often times after costs, renovations, etc., there isn’t that much left over, not to mention the emotional cost of potentially moving out of a house or area you have lived in most of your life.
While the cost on an interest rate basis is high (6.70% currently although this might come down as interest rates come down) it solves two problems:
- Retired individual/ couple have a cash inflow to make retirement more comfortable.
- They can stay in their house.
It also avoids the parents becoming a financial responsibility for their kids.
In most situations we have seen, adult children are delighted to have a slightly lower future estate so Mum and Dad can enjoy a more comfortable retirement.
Like with everything there are terms and conditions, and we would encourage anyone who is keen to look into this further to contact SPRY to discuss (link below).