Your house chopped up for cash

Melanie Bien asks if retired people seeking more income should sell a stake in their property to an equity-release firm
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The Independent Online

After months of stating that it wouldn't regulate home reversion plans - a type of equity release scheme - the Treasury has done a U-turn.

From 31 October, home reversion schemes will come under the authority of City regulator the Financial Services Authority (FSA), at the same time as lifetime mortgages. This means that, for the first time, people will be entitled to some form of protection when they release money from the value of their bricks and mortar by selling a stake in the property, and passing legal ownership, to a financial provider.

The move is overdue and a victory for commonsense. "The current voluntary arrangements may not give consumers the necessary protection and peace of mind they are entitled to," says Chris Kenny, the head of life and pensions at the Association of British Insurers.

Regulation of all equity release products will prevent unauthorised providers from entering the market, and create a level playing field. If home reversion schemes weren't under the remit of the FSA, while lifetime mortgages were, the Council of Mortgage Lenders says that "consumers would [be] confused by the apparent regulatory double standard".

But should people bother with equity release at all? The attraction is obvious. Someone struggling on a low income in retirement can generate a tax-free lump sum of tens of thousands of pounds, or a tax-free income of hundreds of pounds a month, from the value locked in their property. Homeowners don't have to sell up and move out to do this: they can continue to live in their home until they die, when the house is sold and the loan repaid.

The rise in property values and decline in pension provision also means that demand for equity release is growing. According to new research from Birmingham Midshires building society, 15 per cent of Britons plan to sell a stake in their homes to boost their retirement income. This represents a rise of 3 per cent on six months ago.

"Many older people find it frustrating that their wealth is trapped in their property while they struggle to manage on a low income," says Gordon Lishman, the director-general of the charity Age Concern. "Unlocking capital in their homes can seem like a good way to raise extra cash."

But equity release is not always the answer. "An increasing number of people see their home as a 'get out of jail free' card," says Tim Hague, the head of savings and investments at Birmingham Midshires. "Equity release schemes are sensible options for some people, but no one should rely on their home. Houses are not immune from price fluctuations and people should not have all their eggs in one basket."

The reason so much hoo-ha was kicked up about the initial plans not to regulate home reversion schemes was that they are high risk, complex, expensive and can be a disastrous choice if someone doesn't think carefully before signing up.

Many of the retired people who take out these schemes do not really understand what they are getting into or read the small print properly. There are cases of the elderly signing away their homes for a fraction of their true value, and their relatives ending up with no inheritance as a result.

When considering equity release, the FSA warns that good advice is vital. This is one area where it really doesn't pay to skimp. Your home is almost certainly the most expensive asset you own and, more importantly, it's where you live.

An independent financial adviser (IFA) will look at your overall finances to see if this is the best option and help you find the right scheme. Equity release doesn't suit everyone; it is always worth considering whether funds could be raised affordably from other sources before going down this route.

If you do opt for equity release, you should discuss it with your family beforehand. Ultimately, it is your decision, but it will affect them. Informing them of your plans will avoid misunderstandings later.

HOW THE PLANS WORK

A range of different schemes offer tax-free lump sums and/or regular income, but there are two main types: lifetime mortgages and home reversion plans.

To qualify, you need to be at least 60 years old, have no outstanding mortgage debt, and your property should be in reasonable condition.

Lifetime mortgage

* You take out a loan secured against the property. Interest rates are usually fixed but can be high.

* You get a regular income or lump sum.

* Generally, the loan is no greater than 50 per cent of the property's value.

* You retain ownership.

* The loan is repaid when the property is sold - either when you die or move house.

* Your estate receives any cash left over from the sale.

Home reversion plans

* You sell all, or part, of your home in return for a lump sum. The reversion firm only pays you a percentage of the current market value for your property as it may have to wait years for its return.

* You can live in the house rent free until you die or move, at which point the reversion firm is free to sell.

* Your estate may receive nothing from the sale (depending on the proportion sold in the first place).

Source: HM Treasury

For IFA Promotion's free guide, 'Equity Release - Unlocking money from your home', call 0800 085 3250 or download it from www.unbiased.co.uk

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