When your home is your greatest asset

Many pensioners have little money but own a property. So should they consider using their home as security for a loan?

Pensioners often get promises of jam tomorrow, but many have to survive on bread and scrape by today. All too often, they are asset rich, cash poor - with little income, but valuable houses where they have paid off the mortgage. Mortgage plans for older people allow them to use their properties as security for loans, which they never have to pay back themselves. Lenders, including Norwich Union, Northern Rock and NPI, collect the proceeds from the sale of their customers' properties once they have died.

Pensioners often get promises of jam tomorrow, but many have to survive on bread and scrape by today. All too often, they are asset rich, cash poor - with little income, but valuable houses where they have paid off the mortgage. Mortgage plans for older people allow them to use their properties as security for loans, which they never have to pay back themselves. Lenders, including Norwich Union, Northern Rock and NPI, collect the proceeds from the sale of their customers' properties once they have died.

People can occasionally borrow at the age of 60, but most applicants for these cash for equity plans will be 70 or more. The older you are when you start, the bigger the loan you can take. Norwich Union, for instance, will lend you a lump sum worth up to 27 per cent of the value of your house, if you apply at 70. But that increases to 40 per cent if you start at 80. Life expectancy is shorter, so the companies will get their money back that much quicker.

Borrowers can spend the cash on anything they want, including holidays, cars, or indeed to save or invest. Most schemes charge a fixed interest rate. Rates work out at 8.2 per cent and 8.25 per cent with Northern Rock and Norwich Union, respectively.

People themselves may not have to worry about interest, which only falls due for repayment when they have died - or gone into care. But their families lose out, because they would normally expect to inherit the house - and it makes sense to consult them. What is more, costs can be higher than people expect. Age Concern's excellent booklet on the subject stresses that even 7 per cent interest, rolled up for ten years, will double the original debt.

The loan itself is for a fixed sum. Enthusiasts will tell you brightly that if you have a stake in the house, you can always borrow more, as house prices rise. Admittedly insurers normally want a five year gap between applications. Meanwhile, as you get older, you can borrow an increased percentage of the property's value.

That is fine if house prices go on rising. But they can drop, as they did, dramatically, in the late 1990s. Falling house prices, and interest rolling up fast on the original debt, could just possibly ensure that over time the debt would be worth more than the house.

Good schemes will contain a clause preventing the company from collecting back more than the value of the house, whatever happens. Pensioners taking out the Norwich Union roll-up scheme can go further. They can pay a premium of between one to one and a half per cent of the property's value to guarantee that whatever happens to prices and rolled-up interest, they will always have at least a 25 per cent stake in the value of their house.

"The schemes can be attractive for the right people, but they are not the automatic answer for every pensioner," says Justin Modray, of independent financial advisers Chase de Vere. "If people have so little income that they are collecting means-tested social security benefits, the plans may just ensure their own income replaces what the state would provide otherwise."

"In some schemes people will have to repay their loan if they move house - perhaps because they need long-term care. Finally, one or two plans may force you to invest the funds which you have borrowed in their investment plan."

The crucial point is to see an independent financial adviser, for there are any number of small but important differences between the schemes on offer. One trade group SHIP, which stands for Safe Home Income Plans, has a code of conduct, and limiting yourself to member companies makes enormous sense.

Some groups offer straight reversions - where they buy 50 per cent of your property or perhaps more. They cannot claim it until you, or you and your partner, have died. These types of arrangements normally pay out between one third and a half of that 50 per cent in cash, according to Cecil Hinton, one of the best know specialists in the field. Meanwhile, potential increases in value go to the company and people remain responsible for repairs.

One scheme from NPI will prevent people taking out the plan at 70 from receiving more than half the money available as a lump sum. The rest has to go into an income. Even people starting at 80 have to take 40 per cent of the money available as an income. NPI comes under official regulators like the Financial Services Authority, but some smaller companies do not. It makes sense to avoid non-regulated firms.

In the past straight income plans were popular. They allowed people to borrow a proportion of their property's value. The proceeds went into an annuity - an income for life. Once companies had deducted the interest for the loan (on which tax relief applied), pensioners received what was left. Alas, all the virtues have gone. The tax relief has disappeared and annuities are at their lowest level for half a century.

Ways of turning houses into cash, while continuing to live in them, look good. But anyone who likes the idea needs to see an independent financial adviser before making any commitment at all.

'Using Your Home As Capital', Age Concern, £4.99;

Age Concern, 020-8765 7200;

Safe Home Income Plans (SHIP), 020-8390 8166

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

    The 161-page dossier that exposes Fifa's dark heart

    How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards
    Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

    Liverpool have seen too much tragedy to forget Heysel

    Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
    Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

    Khan’s audition for Mayweather may turn into a no-win situation

    The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor