Using your home to pay for care
A home is often a person’s highest value asset, and so, in our experience, it is most common to have to sell the property in order to cover care costs. If the individual requiring care is considering moving into a care home, their property will be accounted for in the financial assessment and it is at this point that most people sell their property. Usually this is when we are approached for advice; to advise on how best to use the proceeds to pay for care, along with existing savings and investments (see Guide to Self-Funding Care).
However, it is important to note that regardless of assets, if certain relatives will continue to live in the property once the care recipient has moved to a care home, the property will not have to be sold. This includes a spouse, a dependent child, a relative over 60, or someone who is sick or disabled.
This article is looking at the options to fund care when the decision is made NOT to sell the property.
12-week property disregard
First of all, lets briefly look at the ’12-week property disregard’. For anyone who requires a care home and owns a property, the value of the property will not be included in the self-funding calculation for the first 12 weeks of care. This is known as the ‘12-week property disregard’ rule.
If the care recipient’s other assets fall below the self-funding threshold during the 12-week period, they will become eligible to local authority funding.
However, once the 12 weeks have passed, the value of the home is included in the threshold calculation and will need to be paid. The purpose of this rule is to give people time to decide what to do with their property.
Deferred Payment Schemes
Even if you or your loved one has savings less than the upper capital limit (see Guide to Self-Funding Care (1)), if you own a property its value will be accounted for in the financial assessment. This will in turn affect your entitlement to Local Authority funding.
To prevent homeowners being compelled to sell the property (in their lifetime anyway), a Deferred Payment Agreement (DPA) with the council lets a care recipient use their home's value to cover care home costs. The homeowner will then be obligated to repay the cost of care once they choose to sell their home or after they pass away.
This is only applicable for long-term placements in a care home, not for shorter respite stays.
Setting up a DPA is designed to be a streamlined process, typically taking no longer than 12 weeks to finalise. This ensures that the agreement is in place by the time you begin contributing to the care fees.
Before you or your loved one will be offered a DPA, your Local Authority will secure a legal charge on the property to ensure the debt can be repaid. This procedure is facilitated by contacting the Land Registry to formalise this charge. Importantly, once the debt is settled, the charge is subsequently removed.
You will then be asked to sign an agreement that states your specific repayment terms. You can usually secure up to 70-80% of the property’s value to go towards your care costs. In rare instances, you may able to secure up to 90% of your property’s value. The Local Authority will typically review the agreement once your care home costs are reaching 70% of your property’s value to determine whether the continuation of a DPA remains the most suitable strategy.
There are two main payment methods:
- Option 1: Your council will handle contracts and make payments directly to the care home. This is the most common type of DPA.
- Option 2: Your council will loan you money to pay the care home and you will be responsible for arranging all the contracts with the care home. This option is typically only available to individuals that are already paying for a care home.
Important considerations for Deferred Payment Schemes
If you opt for a DPA, you will retain responsibility for upkeep and maintenance on your home.
Your council will charge interest. In England interest is charged on the deferred payments and is reviewed every 6 months in January and July.
The council may also pass on charges, including:
- Administration fees associated with setting up the agreement, such as home valuation costs, legal fees, Land Registry fees, postage, phone, and printing.
- One-off charges such as revaluations of your home at a later date.
If you are in receipt of Attendance Allowance or or Personal Independence Payment, your entitlement will remain unaffected.
For people based in England, if you have a DPA, you are entitled to a Disposable Income Allowance, allowing you to keep money aside to cover expenses such as insurance, energy bills, and maintenance costs. This means that if your Local Authority requires a contribution towards the cost of your care, you will only pay what you can afford up to the Disposable Income Allowance, which is currently set at £144 per week.
Deprivation of assets
A quick word on ‘Deprivation of Assets’. Giving away a home or other assets with the intention to reduce the amount needed to pay towards care is known as ‘deprivation of assets,’ and is not permitted. This also includes ‘Trust’ schemes where you are being advised by legal promotors to transfer your property into trust. If the Local Authority thinks deprivation of assets has occurred, they will still include the determined value of these assets in their calculations and payment will be required.
Renting your home to cover care costs
Renting your property can be useful if the value of the rental income can cover all of the care home costs, allowing the property to be kept as an asset.
There are potential benefits to renting out your home to pay for care, including:
- If market conditions mean that by selling today you might not get the property’s full value, then you can keep the property and consider selling at a later date
- The value of the property may go up over time
- The cost of the rental income may cover all of the care home costs. If it doesn’t, you can top up the cost of the fees using savings, pensions or other means of topping up
- You can keep the property in your estate
- Bills such as council tax and utility bills will be paid by the people renting the property
There are also possible downsides of renting out your property to pay for a care home:
- There may be periods of down time between tenants when the property isn’t providing you with any income
- Using a letting agent to manage the property will incur extra costs
- Costs like repairs and redecorating can crop up unexpectedly
- The income you receive from the rent might push you over the limit for Local Authority help, meaning you need to contribute more towards care costs
- You may need to change your mortgage to a buy-to-let mortgage which can have higher interest rates
First steps towards renting out your property
There are a number of people who you should consult with before making a decision about renting out your property to pay for care:
- Your mortgage lender as there may be implications for the type of mortgage you have – for example, your lender may ask you to change to a buy-to-let mortgage
- Your insurance company as you need to check what will change if you decide to let the property. It’s important that your property stays covered for events such as fire, damage or burglaries
- A qualified letting agent, if you plan to use one. They can help to advise you on how to market the property and can tell you how they would manage the property in your absence.
Equity Release (Releasing Money From Your Home)
Equity release is a regulated financial product that allows you to access money tied up in your property. Most equity release schemes in the UK require you to be over the age of 55 years old
The main type of equity release product is a Lifetime mortgage. This is a loan secured against a home, commonly used to fund care within a person’s own residence. This loan does not need to be repaid until the loan recipient dies, or moves into long-term care, such as a care home.
Lifetime mortgages allow homeowners to retain ownership of their property while borrowing against the value of the property. It does not necessitate monthly repayments but the loan will incur interest.
Speak to a later life financial planning specialist if you are thinking about an equity release product.
Harold Stephens is a local, later life financial and legal planning specialist with a special interest in long-term care provision and tax efficient funding options. If you, or your loved one, are at the point of care need and are currently making important care funding decision then get in touch now for an initial chat with one of our specialist advisers by calling 0117 3636 212 or emailing office@haroldstephens.co.uk.
We will also be putting on some in person events throughout October and November in the local area covering the topic of care funding decisions and related later life financial and legal planning. Event details are updated regularly here: https://www.haroldstephens.co.uk/events/
