Dear Delia

Dear Delia I am advising a couple both aged 62 who plan to carry on working until 65. They have a mortgage that is due to be repaid in three years. But they have a shortfall on their endowment policy and have no other liquid assets which means it is likely they will struggle to repay it. They would like to enjoy their retirement without financial problems. What can they do to improve their situation?

Delia says: There are a number of options that could help them deal with their endowment shortfall. Dean Mirfin of Key Retirement Solutions and Paulene McGarry of Mortgage Express offer their views.

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Intermediary responseDean Mirfin is business development director of Key Retirement Solutions

Sadly, this is an increasingly common situation. And the solutions will depend first on affordability.

While the couple are still working they could restructure their existing loan to take account of the shortfall. This could involve a range of options including transferring the shortfall element of their loan to capital and interest to begin to erode the shortfall, or extending the term of the loan for the amount of the shortfall and having this element as interest-only. Neither option may be ideal. The first may have a limited effect in the time available unless they can afford considerable outlay without extending the term. The second does not necessarily meet their priority of enjoying their retirement without financial worry.

Their best option, if neither of the above prove viable, is to consider an equity release scheme to raise the required funding. This would also allow them to review their overall retirement position and enable them to plan their retirement finances.

Assuming that the existing mortgage end date corresponds with their retirements at age 65, this would be perfect timing as they would be eligible for all main equity release schemes. They could opt for either a lifetime mortgage or a home reversion.

As things stand the plans available will provide them with considerable flexibility. Should they only require sufficient funds to cover the endowment shortfall they could facilitate this through the lifetime drawdown options available from Just Retirement and Prudential.

This will offer them peace of mind in that they have the option of returning for further funds should the need arise. Home reversion affords similar facilities with the restructured plan from Bridgewater facilitating guaranteed drawdown of further funds as well as a staged drawdown facility.

Should they require additional funds at the outset they could raise typically 35% to 40% of the property’s value from a home reversion.

Suitability will depend on several things, one of the more obvious being their desire to guarantee an inheritance. This can be made transparent by opting for the Northern Rock protected lifetime mortgage or a home reversion. But this will limit the maximum funds available.

The good news for the couple is that they have many options available to them which can help them to deal effectively with their endowment shortfall and also ensure they have the retirement they want.

Lender ResponsePaulene McGarry is product development manager at Mortgage Express

There are a number of options open to this couple. Assuming they have a reasonable pension plan arrangement they could use some or all of the lump sum available to them when they retire to repay the mortgage outstanding on their property.

This will reduce their monthly outgoings at a time they need to manage their finances carefully, especially if they want to live out their retirement years in relative comfort.

Another option they could consider is equity release. Many older people fall into the category of being asset rich and cash poor and many of these people are now looking to use the equity in their most valuable asset – their home – to make their retirement more comfortable.

Most equity release providers offer lifetime mortgages from the age of 60 and typically will lend between 20% and 25% of a property’s value at this age. The maximum borrowing figure generally increases the older the borrower is. The benefit of this type of arrangement is that the interest is added to the original amount borrowed and the mortgage does not have to be repaid until death or the last surviving of the couple move into long-term care.

Most lifetime mortgage providers are members of Safe Home Income Plans, a body that offers a number of safeguards to people who want to take up this kind of mortgage such as providing lifetime mortgages with a no negative equity guarantee. This means the amount to be repaid on the sale of the property can never be more than the value of the home at that time.

Some providers offer a range of lifetime options including the ability to take lump sums, drawdown facilities and monthly income plans, all calculated according to the age of the applicants and the value of their property.

A third option, again from the equity release market, is a home reversion plan. In simple terms this means that the owners of the property sell a percentage of their home to the home reversion plan provider. In return they receive a discounted price for the part of the property they sold to the provider.

All these schemes may affect the couple’s tax position and some social security benefits they would normally be entitled to. They should seek advice from the Citizens’ Advice Bureau and their tax office. A qualified financial adviser should be able to advise them on which equity release scheme best suits their needs.