Your home can boost your cashflow, but...

Rachel Fixsen looks at the pros and cons of generating extra income

Can you be rich and poor at the same time? Yes - if you are a pensioner. Many retired people find themselves with too little income, yet steadily climbing house prices mean their home has turned into a major asset. The obvious solution is to trade down to a cheaper, smaller place. But, there are other ways of using your home to create income without moving.

Can you be rich and poor at the same time? Yes - if you are a pensioner. Many retired people find themselves with too little income, yet steadily climbing house prices mean their home has turned into a major asset. The obvious solution is to trade down to a cheaper, smaller place. But, there are other ways of using your home to create income without moving.

Equity release plans come in many shapes and forms, but the idea is basically the same. You sign over part or all of your home's value in exchange for a lump sum or an income for life, and a cast-iron guarantee that you have the right to live in your home for the rest of your life.

From a financial point of view, the best solution is to sell your home and buy a cheaper one, then use the profit to produce an income. "It's not always practical," says Graham Bates of Leeds-based independent financial adviser (IFA) Bates Investment Services. "If you have a big family, for instance, with members often coming back to stay... But where it is possible, you should do it," he stresses.

There are many equity release schemes designed specifically for pensioners who do not have the income to repay a mortgage, often more attractive to pensioners who have no children to inherit their property.

Most plans are either sale or mortgage-based. Under sale-based, or home reversion plans, the home owner sells all or some of their property in return for a life tenancy, usually for a token rent, plus a lump sum or an annuity or both. Providers include Stalwart Assurance, Home & Capital Trust and Carlyle Life Assurance.

Home-income plans are mortgage-based, with a fixed-interest mortgage used to buy an annuity for a fixed income for life. Earlier this year the Chancellor abolished tax relief on new home-income plans, making them less attractive. But they were only about one in ten of all equity release plans sold by leading UK providers last year. Other mortgage-based plans include a simple interest-only loan, repayable on death or if the property's sold. Some roll up the interest and just add it to the amount owed.

For a single man of 75, a home-income plan based on a £30,000 mortgage with an annuity may produce a net income of £1,513 a year, says specialist home-income IFA, Hinton & Wild. A home reversion plan involving selling 50 percent of the house may yield £3,406 a year. Non-taxpayers may get more.

In the late Eighties, home-income plans got a bad name, with dodgy schemes leading to disaster for some. House prices were buoyant and large mortgages were raised. The plans combined these mortgages with investments, often in high-yield bonds. But when interest rates shot up and investments performed badly, the return wasn't even enough to cover the loan payments, let alone give an income too, so some pensioners faced losing their homes.

Products today are less risky. Most providers are in SHIP (Safe Home-Income Plans) or adhere to its code of practice. SHIP is a firm set up in 1991 to protect plan-holders from Eighties-style fiascos. Members pledges include providing fair and complete presentation of their plans, and making sure legal work is performed by a solicitor that the client's chosen.

But the National Consumer Council (NCC) says: "Underlying problems that led to mis-selling haven't been removed." The plans are a packaged financial product that falls between different regulators: the mortgage element isn't covered by the Financial Services Authority. NCC welcomes SHIP but says it should be more specific about information members must give consumers; monitor its members' actions; and develop independent complaints-handling and effective redress.

But, says Harriet Hall, NCC legal officer: "[These schemes] can be very useful."

Good independent advice is vital, both from a financial adviser and a solicitor. "If you take the home reversion scheme, for a man of 70, there's 30 per cent difference in income between the best and the worst," says Jon King of Hinton & Wild.

So, ask essential questions. Will you have security of tenure for life? Will extra income affect any benefits you receive? Who benefits from any appreciation in the house value? What would happen if house prices fell - would you or your heirs end up with negative equity? What happens if you want to move? Will sale proceeds still buy a new home? A good IFA should take account of all your affairs, not just releasing equity.

For Age Concern's a free factsheet, "Raising capital on your home", call 0800 009966. Bates Investment Services is on 0113-295 5955, and Hinton & Wild on 0181-390 8166

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