You unlock cash, but an asset flies out the window

Esther Shaw looks at lifetime mortgages and home reversion - two plans that let pensioners raise money without moving
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The Independent Online

The gap is widening between our pension provision and the amount we need just to get by on once we've stopped work. Today, one in five retired people live below the poverty line, says a new report from Professor Merlin Stone of Bristol Business School.

The gap is widening between our pension provision and the amount we need just to get by on once we've stopped work. Today, one in five retired people live below the poverty line, says a new report from Professor Merlin Stone of Bristol Business School.

As they struggle on small pensions, many retirees will look for other ways to boost their income, he adds. In particular, they may seek to take advantage of house price rises during the past 10 years, for these have turned their home into their most valuable asset.

One option for "property rich, cash poor" pensioners is to sell up, move to a smaller property and so free up some money. Yet some won't want to alter their quality of life or leave a house full of happy memories.

As a result, more people are considering unlocking some of the capital in their home via an equity release scheme.

This comes in two main forms. The first is a lifetime mortgage, where you sign over part of your home to a lender in return for a cash lump sum or regular income. The second is a home reversion plan, where all or part of a property is sold to an investment company, which lets you stay there, rent free. In either case, you can continue to live in the property until both you and your partner have either died or moved into long- term care - and there is no restriction on what you do with the income or capital.

In most cases, people want to fund home improvements, help their family pay off debts and have cash in the bank as a "cushion", says research from Saga.

Equity release is a booming market. It is 25 times the size it was a decade ago, according to new figures from the Council of Mortgage Lenders (CML). More than 15,000 lifetime mortgages, worth £693m, were taken out in the second half of last year.

But estimates from the Institute of Actuaries suggest there is scope for plenty more growth, with people aged over 65 sitting on more than £1 trillion in unmortgaged housing wealth.

However, Ged Hosty, spokes- man for industry body the Actuarial Profession, believes equity release is not for everyone. "Taking out a suitable plan can make immediate and big improve- ments to one's overall quality of life," he says. "But the plans should only be considered once all other avenues have been explored, like trading down, using savings or selling other assets."

Before making any decision, you must take advice from an independent financial adviser. The schemes are complicated, involving the handing-over of a valuable asset, and can affect means-tested benefits.

With a lifetime mortgage, the amount you can take - usually no more than 40 per cent of the property's value - depends on your age and the value of your home and is secured against the property. The mortgage doesn't have to be repaid until you die but, when this happens, your family will have to sell your home to clear the loan plus the interest that has been rolling up over the years (and is usually charged at a higher rate than for a normal mortgage).

Most lenders now offer a "no negative equity guarantee", which means you can never owe more than the sale value of your property. But since you make no repayments, the compound interest can mount up quickly, particularly as these deals usually attract relatively high rates - one of the most competitive offers at the moment is set at around 6.75 per cent. All this means that there may be little money left for your children.

Under a home reversion scheme, the lender sells the house when you die and gets the proceeds from its share of the property, with the remainder free to be left to heirs.

The downside is that the sum you receive at the outset is usually much less than the value of the stake you have sold to the company. This is because the lender is paying you for an asset from which it will not benefit for some time.

Saga director Michael Cutbill advocates lifetime mortgages over home reversion schemes. "They are far superior since they potentially allow you to benefit from future increases in house prices."

Dean Mirfin from equity release specialist Key Retirement Solutions adds that it is essential to involve your family in the decision-making process, since a property will potentially be their biggest inheritance asset.

There again, from an inheritance tax perspective, an equity release scheme may reduce the value of your overall estate if some or all of the cash is spent - so helping to reduce the tax bill for your family.

Mr Mirfin adds his backing to lifetime mortgages, largely because the schemes are regulated by the Financial Services Authority - unlike their reversion counterparts. That means borrowers will have a means of seeking compensation should, for example, a product be mis-sold.

Campaigners have been calling for a level playing field for all equity release products, and the Government has now made a commitment to legislate for the regulation of reversion plans in the future - although this has yet to be implemented.

In the meantime, Mr Mirfin recommends anyone wishing to unlock the capital in their home to opt for those lenders that belong to Safe Home Income Plans (Ship) - an industry initiative set up to protect people who hold equity release plans.

HOME FREE

Bill and Josey Knight from Hemel Hempstead, Hertfordshire, took out a lifetime mortgage to repay their £18,400 Nationwide loan and to supplement their pension income.

The couple, both in their late 60s, also used the cash to build a conservatory and renew the central heating.

"Before taking out the plan, I had no choice but to work because of our mortgage commitment," says Bill, a self-employed taxi driver. "But once we had more cash to play with, I was able to reduce my working week."

Since then, Bill has suffered a heart attack that forced him to stop work for a while. "When we took out the plan, it was a blessing in disguise," he says. "If we still had a mortgage to pay off as well, we'd be in considerable debt.

"Our house is our main asset," he adds. "We have hung on to this all through our working lives and want to keep it that way."

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