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

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."

Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
James May, Jeremy Clarkson and Richard Hammond in the Top Gear Patagonia Special
tv
News
Claudia Winkleman and co-host Tess Daly at the Strictly Come Dancing final
people
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
PROMOTED VIDEO
Arts and Entertainment
The Apprentice finalists Mark Wright and Bianca Miller
tvBut who should win The Apprentice?
News
news
Extras
indybest
News
Elton John and David Furnish will marry on 21 December 2014
peopleSinger posts pictures of nuptials throughout the day
Sport
Brendan Rodgers looks on from the touchline
SPORT
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
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

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
    Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

    Marian Keyes

    The author on her pre-approved Christmas, true love's parking implications and living in the moment
    Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

    Bill Granger's Christmas Eve fish feast

    Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
    Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

    Rodgers fights for his reputation

    Liverpool manager tries to stay on his feet despite waves of criticism
    Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

    Amir Khan attacks the Taliban

    'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
    Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

    Michael Calvin's Last Word

    Sepp Blatter is my man of the year in sport. Bring on 2015, quick