For families worried about meeting the costs of long-term care for elderly relatives, the government’s proposals this year—the centrepiece of which was a cap of £72,000 on what anyone would have to pay from 2016—have probably proved disappointing.
This is mainly because the costs covered by the cap are narrower than one might assume. The cost of the actual care received will be included but outgoings on bed and board will not, and that can represent a large proportion of the typical bill of £25,000-£35,000 a year. If your care costs £18,000 a year, you’ll need to spend four years in a home and find another £12,000 or so per year on top of that to pay for accommodation before the state will chip in. Given that average life expectancy after entering a nursing home is less than four years, the cap will have no effect on many people’s situation.
Maybe that’s fair. Perhaps most people should meet their own costs, especially if they own a home. Property represents the vast bulk of most people’s personal wealth and so finding better ways to unlock some of the equity tied up in it is the challenge that really matters. On this, the government has signalled its intention to act. It has pledged that, from 2015, no one will have to sell their home in their lifetime to pay for care, as up to 40,000 people a year currently do. The plan is that people who have less than £23,250 in assets excluding their home will have their fees paid by their local authority and repay them from the proceeds of their estate, secured by a charge over their property.
The details of this state-backed equity-release scheme are still being worked out, but it will carry a government-mandated maximum interest rate and is likely to be capped so that no one’s estate has to repay more than the equity value of their property.
There is hope, then, that this might plug some of the gaps that current private sector equity release schemes leave behind, not least because it will tie the amount your estate ends up owing directly to what you’ve spent on care home fees, rather than asking people to say in advance how much equity they want to release and risk getting it wrong.
Current equity release schemes are not available to people who still have mortgages—something the government’s scheme may well allow—and they tend to work in one of two ways. In the first, you release a portion of your equity via a Lifetime Mortgage at a fixed interest rate. There are no repayments but the interest is added to the sum owed by your estate. If the interest rate is high, you live a long time and the value of your property doesn’t go up much, this can eat up all the equity in your house and more—hence products that come with a “no negative equity guarantee” meaning you can’t owe more than the equity in your property when it is sold. The other main product is known as Home Reversion and enables you to sell a fixed percentage of your home at a discounted price. So you might sell a 40 per cent equity share at a 50 per cent discount to its current value, meaning you actually receive 20 per cent of what your house is worth today. The discount you’re offered will depend on your life expectancy, so these products work best for people later in life since they’re likely to be offered a smaller discount. When you die, the lender will take 40 per cent of the sales proceeds of the house as repayment.
Neither of these products is ideal for people who need to unlock the equity in their property to cover residential care fees, so the challenge to the government is clear. A cap at £72,000 is all very well, but what most people really need is a better way of releasing their housing wealth.