Money: Deals that aren't as safe as houses

Shared appreciation mortgages enable the elderly to release funds tied up in their homes. But there may be a catch, says Sarah Pennells
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The Independent Online
The problem of how to stay in your home as you get older can be a great worry for elderly people. Even if you are physically well, you may not be able to afford to remain there. Many are "asset rich and income poor" - they own their property outright but have little by way of a pension to live on.

Selling up may be a solution for some, but not all, says Simon Tyler of Chase de Vere mortgages. "If someone's lived in their house for much of their adult life, they are likely to find the idea of selling it and moving elsewhere quite upsetting."

With house prices rising, making use of the cash that is tied up in your home is increasingly looking like an attractive option. However, this concept received a bad name in the late 1980s, when thousands of elderly people were sold Home Income Plans.

Many were promised that these would give them an income for life and a mortgage they never had to make payments on. Instead, falling house prices and spiralling interest rates meant a massive debt and little income.

Safeguards have now been introduced into home income plans to make sure this problem doesn't arise again.

Meanwhile, a new breed of loans aimed at elderly home owners is on the market, although it looks as if some of these schemes may run into trouble.

One consumer organisation, the National Association of Bank Customers, has referred a so-called "shared appreciation mortgage" (SAMs) contract to the Office of Fair Trading (OFT) because it says the contract is unfair.

SAMs were launched a couple of years ago and were initially marketed by the Bank of Scotland. They seemed like a foolproof way of raising money on one's home. The idea was that when home owners took out a mortgage they either paid interest at a fixed rate or interest was rolled up.

When the house was sold, the Bank of Scotland took a percentage of any increase in its value and the owner kept the rest. It was so popular that the funds for SAMs were snapped up in months.

However, snapping up a SAM mortgage was a decision one reader was to regret. As a result, his contract has been referred to the OFT. Mr Adams, who is 75, bought a two-bedroomed flat on a new West Country estate around 18 months ago.

He paid pounds 66,950 for it and borrowed pounds 24,000 using a Bank of Scotland SAM. His solicitor checked over the details of the loan before Mr Adams signed up. "I knew that if I moved within three years I'd have to pay a penalty of three months' interest and an administration fee, but I hoped to stay in the flat for a number of years," he explains.

In the event, he was forced to sell his flat after less than12 months because of failing health, which meant he had to repay his mortgage.

"I put the flat on the market at pounds 71,950 but didn't get any interest in it in three months," says Mr. Adams. "So when I was offered pounds 67,600, I took it."

He was keen to move quickly and thought he'd been offered a fair price. However, he was shocked to receive a letter from the Bank of Scotland telling him that it believed the flat was worth more and he'd have to pay them an additional pounds 3,000.

He decided to go ahead with the sale because he was told he might be liable for his buyer's costs.

"I was also worried that I might not get another buyer quickly," he explains. "I've since had my own independent valuation done, which said the flat wasn't worth the amount the bank valued it at, but I'm still no better off."

The Bank of Scotland said in a statement that because Mr Adams' valuation was carried out after he had redeemed the mortgage, he didn't have any right of appeal.

Jon King, of Safe Home Income Plans, says he is not surprised that the SAM has run into problems. "We always felt the sticking point with this type of loan was that you had to redeem it if you wanted to move. If you're under pressure to sell quickly there is little you can do."

The Bank of Scotland says it is keen to reintroduce the SAM as soon as it has funds and Barclays Bank is piloting a loan, called a Protected Appreciation Mortgage (PAM), in Wales and the south-west of England. As Ray Boulger, of mortgage broker John Charcol, explains, the loan is not repaid until death.

"With a PAM you know exactly how much interest you will owe from the outset," he says. "The interest is worked out on an actuarial basis, so the longer you live, the better value it is."

However, adds Mr Boulger, it may be too inflexible for some people. "You can take the loan from property to property, but borrowers may prefer the option of being able to pay off the loan if their circumstances change."

Other products on the market come from Norwich Union and Northern Rock. Norwich Union's Capital Access mortgage charges interest at 2.9 per cent on the value of the property and not the loan, says Mr Boulger.

"This allows you to borrow between 20 per cent and 30 per cent of your property's value depending on your age. As you pay the same amount of interest no matter how much you borrow, it's better value for some than others."

Northern Rock's Home Equity Release is a more simple product, where interest is simply rolled up at 7.5 per cent, and you have the right to live in the property until death.

However, the interest rate is quite high and Philip Cartwright, of London and Country, says raising money using any of these schemes can be expensive.

"It could be cheaper for another family member to borrow the money, which is why taking out a mortgage like this should always be a family decision," he explains.

"If you have no dependants, or passing on your house after your death isn't an issue, you should simply look at the scheme that gives you access to the largest amount of money."

n Contacts: Bank of Scotland, 0845 306 0032; Barclays, 0800 000929; Northern Rock, 0845 600 2220; Norwich Union Capital Access, 0845 300 1622; Safe Home Income Plans, 0181-390 8166.