Retirement homes: The benefits – and the perils
Stay put? Over-55s development? Or equity release? Chiara Cavaglieri looks at the options, and their pitfalls, for homeowning retirees
Sunday 15 May 2011
Planning for retirement often centres around the home, with some retirees determined to stay put, and others happy to downsize, upsize, release equity or even up sticks to a new-build development.
Whatever your decision, there are plenty of pitfalls to watch out for and simple ways to ensure that your retirement is a golden one.
With an ageing population looking for affordable housing, an increasing number of developers will be hoping to cash in on housing retirees. Retirement villages are not to everyone's liking but they can offer buyers the chance to remain independent, yet benefit from a wide range of services.
Mitchison Court in Sunbury, Surrey, for example, offers shared ownership apartments built for the over-55s. A housing association Notting Hill Home Ownership offers a scheme that enables buyers to pay just 75 per cent of the market price, with the remaining 25 per cent government-funded through Notting Hill Housing, which effectively owns that share of the property. "People often have a negative perception of retirement homes and automatically think of care homes. That's not what we're offering here," says Mark Vaughan, managing director of Notting Hill Home Ownership.
Prices start from £198,000 for one bedroom apartments and £241,000 for two-bed apartments. The development offers services such as cleaning, laundry, meals and hairdressing. Staff are on-site all day, every day, for residents with care needs, and each flat has features such as arthritis-friendly taps and emergency pull-cords.
"Mitchison Court provides a solution for people who want to live an independent lifestyle but also recognise the benefits of having access to care and support services as they get older," adds Mr Vaughan.
Under most shared-ownership arrangements the developer charges rent on the proportion it owns, but with this deal there is no rent payable on the 25 per cent. But there are other costs, including a service charge which could cost from £400 per month, and council tax, which starts from around £123 per month for a one-bedroom apartment. Also, there may be restrictions when selling. If you have managed to buy more shares and own the property outright, you are free to sell on the open market, but if not, you must sell through Notting Hill Home Ownership which also means covering its solicitor and valuation fees.
Melanie Bien, director of independent mortgage broker Private Finance, advises that you ask the tough questions before signing up: "Are you wholly responsible for the cost of any repairs, even if you don't own all of the property? And what happens to your 'share' when you pass away? Can you bequeath it to a relative – and if so, do they then have to sell it to realise its value? Disposal is a very important issue, even at the start when you are buying into one of these schemes."
At Mitchison Court, when buyers die they can leave the property to a relative who can live there if they are over 55, but must sell if not. Notting Hill Home Ownership helps with the sale but the benefactor would only get the appropriate share of the sale price.
As well as picking a location carefully, it's worth looking out for innovative payment options. For example, Dunwood Court, a luxury retirement village in Romsey, Hampshire, has a "free house swap" scheme. With this, you sell your current home to the developer – which uses three agents to value it and take the average price – less 2 per cent agent's fee to remarket it.
"'Close Care' developments such as Dunwood Court offer long-term independent living due to the immediate support available from the separate, but on-site nursing home," says Russell Donnelly, director of Dunwood Court.
Prices start from £350,000 for a two-bedroom apartment, and if the value of your original home is higher than that of the Dunwood home, you pocket the difference. There's even help on hand to pack, unpack and transport you to the development, which has a care manager, maintenance staff, a nurse-call system in every home, a minibus for trips to Romsey and even meals organised for you if you wish.
Again, it's vital to find out exactly what you're getting yourself into. At Dunwood Court, buyers wishing to move out can sell their home back to the firm, less the percentage involved to remarket the property. But you may find there are issues with the resale value – your home may only appeal to a very limited number of potential buyers and there may be developer's restrictions on who you can sell to.
"Also, what if you want to move because you don't like it, or your circumstances change? How easy would that be? Or are you effectively trapped until you die?" says Ms Bien.
Equity release is yet another option for retirees. Equity-release schemes fall into one of two types; lifetime mortgages and home reversion schemes. With the former, you borrow part of your property's value and pay interest on that amount which you only pay back when you die or sell your home.
The kicker here is that the interest, typically a fixed rate, is "rolled up" and added to the loan. You pay interest on a figure that could easily double in a short time. If you borrowed £40,000 at 7 per cent, the debt would grow to £78,686 in 10 years; after 20 years you'd be looking at a mammoth £154,787.
Watch out for early repayment charges (ERCs), too. These can cost you thousands of pounds. The maximum you can borrow will also depend on your age and the value of your home. With LV=, say, this ranges from 20 per cent of the value of your property if you are 60, to 50 per cent at 95.
With home reversion schemes, you sell a percentage of your home, for less than it is worth, but you can stay put for the rest of your life. When you die, or sell the property, the equity release provider keeps its share as repayment.
So, if you handed over 20 per cent of your home, it takes 20 per cent of the sale price. The big problem is that you can't benefit from full property price growth and, as you no longer own your home, it cannot be passed on directly to any children or grandchildren.
Geraldine Mitchell, Surrey
For Geraldine Mitchell, an 84-year-old widow, downsizing from herfour-bedroom family home in Thames Ditton to a two-bed property at the nearby Mitchison Court development in Sunbury offers the perfect balance.
"Mitchison Court offers something that I haven't been able to find elsewhere in the borough," she says. "The care services mean I can move in now and continue to enjoy my busy social life, but with the peace of mind that if I need care in the future, it's all on hand and there will be no need for me to move again."
The apartment cost her £189,750 for a 75 per cent share of the property with no rent to pay on the remaining 25 per cent. Geraldine will move in at the end of the month and plans to use the second bedroom as a computer and guest bedroom.
"The property has been designed with older buyers in mind," says Mrs Mitchell, "with facilities, such as the day centre, all on my door step."
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