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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
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

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    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