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

News
people
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvDownton Abbey review: It's six months since we last caught up with the Crawley clan
Sport
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
PROMOTED VIDEO
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Sport
premier league
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Sport
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
News
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
News
i100
News
i100
Sport
Plenty to ponder: Amir Khan has had repeated problems with US immigration because of his Muslim faith and now American television may shun him
boxing
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

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    A roller-coaster tale from the 'voice of a generation'

    Not That Kind of Girl:

    A roller-coaster tale from 'voice of a generation' Lena Dunham
    London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

    London is not bedlam or a cradle of vice

    In fact it, as much as anywhere, deserves independence
    Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

    Vivienne Westwood 'didn’t want' relationship with McLaren

    Designer 'felt pressured' into going out with Sex Pistols manager
    Jourdan Dunn: Model mother

    Model mother

    Jordan Dunn became one of the best-paid models in the world
    Apple still coolest brand – despite U2 PR disaster

    Apple still the coolest brand

    Despite PR disaster of free U2 album
    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments