Equity Release Provides A Pension
Boost To
Retired People :
 Research by the Consumers' Association shows that many schemes are too expensive
and inflexible. Often, they are misunderstood, leading people to buy inappropriate
plans.
Simon Farrant of financial adviser Towry Law in Bracknell, Berkshire, says:
'These schemes are not a quick fix, but should be chosen last. You should
consider other investments and savings before cashing in on the house.
'Elderly people see an increase in the value of their home as free money
- that's wrong. They are gambling on their property with these schemes.
They should not get carried away with all the marketing hype.'
The Consumers' Association agrees that equity release schemes should be the
last resort. It says the complexity of individual plans means it is crucial
to seek independent advice.
Financial Mail investigates the key facts of equity release:
What are these schemes?
EQUITY release schemes unlock the value tied up in a home. There are three
types:
• The most popular is the 'home reversion' option, where customers trade
in part or all of their property in exchange for a lump sum or income, living
in the house 'rent-free' until they die.
• Next is the 'roll-up' plan, which provides cash, usually a lump sum,
for those willing to take out a mortgage. Interest on the loan rolls up and adds
to the outstanding debt, which is cleared by the sale of the house on death.
• With a 'home income' plan, an interest-only mortgage is taken out and
the cash is used to buy an annuity, which pays a monthly income. Mortgage interest
is paid monthly and the capital is repayable on death.
What's the catch
MOST schemes provide poor value. Usually, the income or lump sum generated
is small compared with the value of home that must be given up. Also, all
equity release schemes eat into any legacy for children - some more than
others.
Are there any specific problems?
HOME reversion schemes are not regulated, which means that people who buy
these plans are vulnerable to unscrupulous sales practices.
Roll-up mortgages give customers a lump sum with the debt increasing along
with interest payments over time. This means that the longer you live,
the bigger the final bill that must be paid, though it is possible to get
a guarantee that it will never outstrip the value of the home.
Home income plans are dying out. With falling interest rates, the meagre
income they provide makes them unattractive. These schemes should not be
confused with plans of the same name that were outlawed in the early Nineties
when customers were threatened with the loss of their homes if property
values fell.
Who do these schemes suit?
THOSE people who have explored all other avenues, do not have other savings
or investments and do not wish to move to a smaller house and take advantage
of the extra income this can create. They are for homeowners who want to
take advantage of the rising value of their homes without moving.
Any particular advantage?
YES. Though unregulated, home reversion schemes are straightforward and providers
abound. Typically, the longer you live, the better the deal you will get,
though they are usually available only to those aged at least 65.
Widower Maurice Willey, 79, recently cashed in some of the value of his home
through a home reversion scheme with Britannic Retirement Solutions. He
wanted extra cash to supplement his pension and to ensure that his home
was well-maintained.
Maurice, of Woodbridge, Suffolk, says: 'I was under pressure and looking
at ways to ensure I could maintain a comfortable standard of living. I
consulted my family, who are all grown-up, and they were happy for me to
take advantage of the equity in my home.'
People as young as 50 can choose roll-up mortgages, which makes them appealing
to more people. But the drawback is that interest charges rack up. The
younger you are when you take out a scheme, the less chance there will
be for equity to be passed on to family.
Home income plans are suitable only for those aged at least 75. Unlike a
roll-up loan, mortgage debt is fixed, which means heirs are not disadvantaged.
Which scheme should I choose?
DO not make a choice without consulting family and seeking help from an adviser
skilled in equity release. Trade body IFA Promotion can provide details of
specialist advisers, call 0800 085 3250 or visit www.unbiased.co.uk.
The equity release scheme trade body, Safe Home Income Plans, will give details
of product providers. Call 0870 241 6060 or visit www.ship-ltd.org.
How much value can you draw?
Home reversion:
A 70-year-old couple who cash in £100,000 of the current
value of their home, worth at least that amount, might draw an income of
about £3,000 a year for the rest of their lives, or a lump sum of £40,000,
through a scheme such as one offered by Hodge Equity Release.
Roll-up:A 70-year-old couple who take out a loan of £100,000 might
receive a lump sum of £27,000 from a 'roll-up' mortgage. With the average
life expectancy at this age being just over 17 years, the total amount due
on death might be about £100,000 with a roll-up mortgage deal such
as the one offered by Norwich Union.
Home income: Based on a plan with Allchurches Life Assurance, an 80-year-old
man or 85-year-old woman might take £30,000 on a house worth at least £100,000,
or a yearly income of £4,200 or £4,400 respectively. But £1,900
a year is consumed in mortgage interest.
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