The combination of the housing and consumer credit booms over the past decade have left much of Britain asset rich but cash poor. It is now strangely common for families to be struggling with credit card and personal loan repayments, while living in a property worth hundreds of thousands of pounds. Although their personal balance sheet may be well in credit, they find themselves struggling to make ends meet each month.
"The biggest increase in enquiries we've seen – about releasing money from their properties – has been from people aged 65 and over, who are in debt," says Peter Fisher of the Nursing Home Fees Association, which provides a specialist equity release advice service. "One couple in their seventies who came to us had £100,000 in credit cards debt, and an income of just £700 a month."
If you're still working, the easy way to readdress the balance is by remortgaging. If you're already tied in on a fixed-rate deal, you may need to take out a separate second mortgage – but this is likely to prove much cheaper than servicing punitive interest charges on your credit cards.
But if you're coming up to – or are beyond – retirement, unlocking the value from your home is slightly more complicated, and may have greater implications on what you have left to pass on as an inheritance when you die.
One of the simplest ways of cashing in some of the value in your home – at least in terms of the paperwork – is by selling up and buying a smaller property. Most retired couples find they no longer need so much space, and may also want to think about moving to a quieter area, or somewhere closer to their relatives.
For some, however, selling the family home is unthinkable, especially when it comes to properties that have been within a family for several generations. In these cases, it may be worth considering a so-called " equity release" plan, which allows older couples and individuals to unlock some of the value from their home without having to sell up.
There are two types of equity release plans. The first is generally referred to as a lifetime, or roll-up, mortgage – and typically allows you to get your hands on up to 50 per cent of your property's value, while keeping the right to stay in your home for the rest of your life. Interest is then charged on the loan, just like a normal mortgage, but it rolls up over time. The loan and interest are paid off when you die, or if you sell the property.
The amount of money that a lifetime mortgage provider will be prepared to advance you will depend on your age. Most will not accept customers below the age of 55, at which age they will probably be unwilling to give you a loan of any more than 20 per cent of your property's value. If you take out a plan over the age of 70, however, you are likely to be able to get your hands on a much bigger percentage.
The downside to lifetime mortgages is that they leave you with little certainty over how much money – if any – you will have left in your property when you die. However, as long as your provider is a member of the Safe Home Income Plan group (SHIP), then you are guaranteed to never have to pay back more than the value of your property – regardless of how long you live in it for and what happens to house prices.
This means you can still benefit from any uplift in the value of your property, while remaining protected on the downside.
Andrea Rozario of Rozario Harris, the specialist equity release adviser, says lifetime mortgages tend to make more sense if you are already in poor health and are concerned that you might die within a few years, as you will pay less for the loan.
HOME REVERSION PLANS
The other main type of equity release plan is the home reversion. This involves selling all of, or a share in, your property – in return for around half of that share's market value – while retaining the right to stay in it for the rest of your life. Again, the amount of money that you receive will depend on how old you are.
If you sell your whole property at age 65, for example – which is the minimum age for most reversion plans – you are unlikely to get much more than 40 per cent of its market value at the time. However, if you sold the entire property at 80, you would get more like 60 or 65 per cent.
The advantage of a reversion plan is that it provides you with a level of certainty that a lifetime mortgage does not. If you sell a 50 per cent share in your property, you know that you will still have 50 per cent of your property to pass on to your estate when you die. If you opt for a lifetime mortgage, however, the share of your property which will be left to your estate will depend on how much interest has rolled up since you took out the plan.
The downside is that if property prices go up, your upside is limited. Once you've sold off a share to a reversion provider, they will keep any capital growth on that share of your home. And if you've sold the whole property, you will get none of the uplift.
Rozario says that the choice between taking a lifetime mortgage or a reversion one often comes down to people's views on where house prices are going, how long they think they're going to live, and how much certainty they want. "Some people simply don't like the idea of selling some or all of their home, and want to retain ownership," she says. "But others want the maximum they can possibly get while knowing that they can stay in the property."
It's important to find out exactly what fees and charges you're liable for when taking out an equity release plan. Most lifetime mortgages will hit you with an arrangement fee of a few hundred pounds, as well as a smaller fee for a valuation of your property. There will then be legal fees of a few hundred pounds to pay to your solicitor.
"Typically, you're looking at something like £1,000 to get an equity release deal off the ground," says Fisher. "Although some lenders will offer free surveys and will also contribute to legal costs."
The other important thing to watch out for is early redemption penalties. Some companies charge several thousand pounds if you decide to pay off your loan within the first few years of taking out the plan – although thankfully you and your family will not have to pay such penalties if you move into long-term care, or if you die – as long as you use a provider who is a member of SHIP.
Some early redemption penalties can be as high as 25 per cent. Norwich Union, Just Retirement, Prudential and Stonehaven all calculate early redemption penalties based on changes to yields in the gilt market which, they say, affect their costs.
In the case of NU, for example, you'll be hit with a penalty of over £10,000 if gilt yields have fallen by more than 1 per cent since the time you took out the loan.
"Clients cannot understand these charges, and most advisers can't either, which is why we won't recommend them," says Fisher. "In my opinion, these are flawed products."
Unlocking money from your home is a big decision, and it's highly advisable to seek some professional financial advice to ensure you get the best product. As well as affecting how much money you will have left to pass on to you family, it may also affect the level of benefits you are receiving.
"It is imperative, as this is such a complex area, that customers seek advice when considering equity release – and the advisers they see should be qualified in this area – holding the CF7 qualification," says Karen Brenchley of Saga Personal Finance. "Many customers may have other investments that could work harder for them to fulfil their needs and they may be entitled to state benefits that they are not claiming.
"We always checks to see if a customer could claim any additional benefits – this additional money may not negate the need for equity release, but it may reduce the amount of money that needs to be released, and therefore save interest."
It's also important to consider how you will fund any long-term care costs, should you need to move into a care home in later life. It is often a good idea to make sure there is some equity left in your home for such an eventuality.
Advice, however, can be costly. Some advisers, such as the NHFA and Saga, charge a flat fee of between £400 and £500. However, other advisers will charge you a percentage of the value of the transaction – typically 1.5 per cent.
This is in addition to the commission that they are likely to receive from the provider for passing your business their way.
"Make sure you get a written report before you make a decision," says Fisher. "We turn away about 40 per cent of people because we think it's the wrong decision. If you've got existing savings, for example, it makes more sense to run them down first before going ahead with equity release."
Fisher adds that it is worth asking your adviser about draw-down equity release products, which allow you to take the money from your home as you need it, rather than drawing it all down in one lump sum. This ensures you're not paying interest on any money that you're not using.
Also, pay attention to the rate you're getting. Although the market is much more competitive than it was, there is still a relatively big spread between the cheapest and most expensive deals in the market.
To find a financial adviser in your area, visit www.unbiased.co.uk. Or visit www.nhfa.co.uk.
Sale and leaseback schemes: the dangers
Another way of unlocking money from your home is to sign up to one of the growing numbers of "sale and leaseback" schemes. These work by you agreeing to sell your home at a discount to its market value, and then renting back from the purchaser.
Homeowners should tread with caution before signing up to these sorts of plans, however. The vast majority of these plans are offered by unregulated companies – as they are deemed to be straightforward property sales, rather than equity release products.
Although many companies promise to rent you back your property for the rest of your life, there have been a growing number of worrying examples over the past year, where sellers have only been given short-term contracts, allowing their new landlord to evict them from the property after a year or two. Some of these companies will pay you as little as 50 per cent of your property's value.
There are, however, two regulated companies that operate schemes similar to this – SYH Charterhouse and Acrewood. Michael Holt, managing director of SYH Charterhouse, says: "The client sells the whole of their property, but they are guaranteed a lifetime lease to stay in their home. In a lot of schemes, they purport to offer a lifetime lease, but they actually only give them one or two years."
SYH's scheme typically charges rent at around 2.5 per cent of the value's property, rising at around 3.5 per cent every year.
The advantage of the scheme is that it is available to younger people than most equity release plans. It has a minimum age of 50, and one partner can even be 45, as long as the other is over 50.
The younger you take out the scheme, however, the less money you will receive for your property. For example, someone selling it at 50 would only receive around 50 per cent of their home's value. While at 60, you might receive 60 per cent.
Citizens' Advice and Shelter have been campaigning to get other sale and leaseback schemes regulated, to ensure that elderly people cannot be evicted from their homes. But in the meantime, if you're looking at this type of plan, proceed carefully, and seek financial advice before you sign up to anything.
Equity release checklist
* Consider the alternatives, such as downsizing to a smaller property.
* Discuss your plans with your family.
* Find a specialist financial adviser, qualified to advise on long-term care as well as equity release.
* Ask your adviser about fees and commissions.
* If you're already in poor health, it may be possible to get better terms from your provider. Ask your adviser to check.
* When looking at interest rates, always look at the APR, not the headline rate.
* Make sure you have a solicitor who is familiar with equity release.
'We needed to do renovations'
Alec Trueman, 66, and his wife Elizabeth, 63, first looked into releasing some money from their home earlier this year, because they decided that the kitchen and bathroom were in need of refurbishment.
Having discussed the options with his family, Alec eventually took out a £25,000 lifetime mortgage from the Prudential.
"It's a good way to make your home self-sustaining," he says. "Investing the money back into the house should increase it's value, so it's good value."
The couple decided to also ensure that any renovations they made would make the house easier to get around, should either of them become less physically mobile when they're older. "This way, we can be sure we can live in the property for many more years," he says.
"My family are all more than comfortably off, so they won't need any value from our property," he adds. "We also used some of the money to pay for a funeral plan, so that our family won't have to worry about any of that."
Although their property will be next to new after the changes, they hope not to be there too much. "We've got a caravan and love to travel around the country," says Alec.Reuse content