FOOL'S EYE VIEW
Unlocking The Wealth In Your Home

By Jane Mack (TMFJane)
March 6, 2003

Did you know that the over 60s in the UK have around £550 billion worth of equity tied up in their homes and yet nearly half of all single pensioners are dependent on State benefits?

It's understandable that people want to hang on to their homes in their retirement but it does seem unfortunate that many live seemingly hand to mouth when they could use the equity in their homes to make life a little more comfortable. And they wouldn't have to move out either although moving to a smaller property is one option that should also be considered.

Equity release plans, as they are known, are growing in popularity as more and more pensioners realise that there's no point in sitting on a vast amount of equity which may ultimately be taken away from them if they have to move into residential care. Of course, many would like to leave their homes to their children but there's no point in living in near poverty just to achieve that aim.

There are three main types of equity release plan and they all have their advantages and their pitfalls so it's as well to outline how each of them works.

Home Income Plans

Sometimes known as Mortgage Annuity Schemes, these are probably the least popular of the lot as you're forced to buy an annuity with most of the equity released from your home. Essentially, you take out a loan which is secured against the house, buy an annuity with most of it and use some of the regular guaranteed income to pay interest on the loan. The reason they're not so popular these days is because annuity rates are so low that it really only makes them worthwhile for those who are over 80 years old. There also used to be tax concessions which are no longer available thus making them less attractive.

Cash Release Plans

In this instance, you take out a loan secured on your house but, unlike the Home Income Plan, you can do as you like with the cash. Instead of making monthly repayments, the interest on the loan simply rolls up each year and is only repaid when your home is sold, either when you move into residential care or when you die. As with mortgages, the interest rates vary so you can choose fixed or capped options if you like so you'll know the amount of interest that will accumulate each year.

Home Reversion Plans

The increasingly popular reversion plans involve 'selling' a percentage of your home to a company for a fixed sum or a monthly income although you retain the right to live there for the rest of your life. When your home is eventually sold on your death or on moving into care, the reversion company gets the agreed percentage of the sale proceeds – typically 50% - 75%. If house prices have gone up, the company gets the benefit of the increase.

The crucial benefit of all three types of equity release plan is that you don't usually have to sell up and move out. In effect, you 'spend now – pay later' which, let's face it, as you can't take your money to your grave, you might as well do if you need extra money for your retirement years.

A few warnings about the schemes though:

• If you're receiving means-tested, Social Security benefits then any extra income you get from an equity release plan may result in your benefits being reduced.
• If you invest the cash you receive then you'll likely be subject to tax on the income (although if your estate has a potential inheritance tax bill after you die, then an equity release scheme could help to cut it).
• Depending on which scheme you opt for, interest may build up to such an extent that there is no equity left in your home – particularly if interest rates increase.
• Unless you get a guarantee that the amount repayable will never be more than the sale proceeds, you could face a shortfall when the loan has to be repaid.
• Most schemes involve legal and valuation fees which could be as much as £1,000 although some companies will reimburse these if you follow through.

There are other important considerations too and you can find out more from Age Concern who have an excellent factsheet on the subject. As the industry is not fully regulated yet, it's advisable to use those companies which are members of the Safe Home Income Plans (SHIP) organisation as it means they agree to abide by a voluntary code of practice to safeguard homeowners.

As these are fairly complex products, you may want to take some advice from a fee-based Independent Financial Adviser (naturally) so they don't get carried away with suggesting a plan that pays them the highest commission. Using your home to provide you with extra money in your old age needs careful thinking and it shouldn't be done lightly.

More: Age Concern Factsheet (pdf file) | SHIP