How to cash in on the value of your home

After more than a decade of phenomenal growth, UK house prices have finally started to slide over the past few months, with some parts of the country already recording double-digit falls since the peaks hit in 2006 and 2007.

Nevertheless, for many couples reaching retirement, the family home is still worth tens or even hundreds of thousands of pounds more than they ever thought it would be – and with inflation on the rise and annuity rates falling, increasing numbers of families are keen to cash in on their gains before house prices slide any further, using the extra cash to top up their pension, or maybe just to pay for a holiday or home improvements.

The simplest way to cash in on the equity in your home is to sell up and buy a smaller property – or a similar sized one in a cheaper part of the country. But for many families, who have spent decades in the same property, moving out is unthinkable.

The next best option is to consider an equity release plan – which allows you to get your hands on some of the value of your property, while continuing to live in it.

There are two main types of equity release plan – lifetime mortgage and home reversion – and while the former has historically been much more popular, the current falls in house prices are starting to make reversion plans look more attractive. However, if you're thinking of taking out an equity release plan over the coming year, it may make sense to act quickly, if you want to get a good rate.

Home Reversion

Home reversion plans effectively allow you to sell all, or part of, your home to a third party, who will pay you the value now, and recoup their money when you die or sell the property. Most will give you a maximum of around 40 per cent of the value of the property, or the stake that you want to sell.

So, for example, if your home is worth £100,000 and you wanted to sell half of it through a reversion plan, you would receive around 40 per cent of £50,000 – £20,000. If you sold the property at a later date, or died, the provider would be entitled to 50 per cent of the value of your property at that time. If house prices had trebled, this would mean that you had lost out on half of the gain you could have made. But if prices had fallen in the meantime, this would mean you had realised a better deal.

Peter Fisher of the Nursing Home Fees Association (www.nhfaequityrelease.co.uk), which has a specialist equity release advice arm, says that now house prices are falling, reversion plans represent better value than they did. However, he adds that some providers have also begun to reduce the amounts that they will pay on people's properties, due to fears of how far prices will fall.

"If someone is thinking about taking out a reversion, they may be better to do it now, rather than waiting," says Fisher. But he stresses that it's important to seek specialist professional financial advice, to ensure you don't make the wrong decision.

Lifetime mortgage

The other main type of equity release plan is the lifetime mortgage. As the name suggests, these are mortgages where the interest is rolled up and paid either when you sell the house or when you die. Most lifetime mortgages have a "no negative equity" guarantee, meaning that if you live long enough for your loan and interest to outgrow the value of your house, the loan provider cannot force you to pay anymore.

The downside to lifetime mortgages is that they give you less certainty about how much you will have to pass on to your family when you die. If house prices continue to fall, the value of your home could be completely eaten up by the interest. With a reversion plan, however, you do at least know what you'll be left with.

Andrea Rozario, the director general of Ship, the trade association for equity release providers, says the good news is that equity release rates have come down in recent years. Furthermore, the credit crunch has not, as yet, had too great an effect on either rates, or the availability of loans.

Sale and Rent back

A third, lesser known, way of releasing money from your home is through a sale and rent-back scheme, whereby you sell your property, but are given the right to continuing living in it for a small rent. Unlike reversions and lifetime mortgages, these schemes are unregulated, which means you should tread very carefully before signing on the dotted line.

Over the last few years, there have been many horror stories of elderly people selling their homes for a fraction of the property's value, only to be turfed out a few months later. Some providers offer a guarantee to let you rent your property for the rest of your life, but it's important to read the small print.

Although a few fledgling trade associations, such as the National Association of Sale and Rent Back (www.nasarb.org), who have been working on a code of practice for the industry, this is not the same as full-scale regulation, and there are still too few options for consumers who are ripped off.

If you're considering taking out any of these schemes, its crucial that you take specialist financial advice. Equity release transactions will affect the amount of inheritance you have left to pass on to your family, and may affect your financial options if you are ever in need of long-term care. To find a financial adviser in your area, visit www.unbiased.co.uk .

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