When your home is your greatest asset

Many pensioners have little money but own a property. So should they consider using their home as security for a loan?

Pensioners often get promises of jam tomorrow, but many have to survive on bread and scrape by today. All too often, they are asset rich, cash poor - with little income, but valuable houses where they have paid off the mortgage. Mortgage plans for older people allow them to use their properties as security for loans, which they never have to pay back themselves. Lenders, including Norwich Union, Northern Rock and NPI, collect the proceeds from the sale of their customers' properties once they have died.

Pensioners often get promises of jam tomorrow, but many have to survive on bread and scrape by today. All too often, they are asset rich, cash poor - with little income, but valuable houses where they have paid off the mortgage. Mortgage plans for older people allow them to use their properties as security for loans, which they never have to pay back themselves. Lenders, including Norwich Union, Northern Rock and NPI, collect the proceeds from the sale of their customers' properties once they have died.

People can occasionally borrow at the age of 60, but most applicants for these cash for equity plans will be 70 or more. The older you are when you start, the bigger the loan you can take. Norwich Union, for instance, will lend you a lump sum worth up to 27 per cent of the value of your house, if you apply at 70. But that increases to 40 per cent if you start at 80. Life expectancy is shorter, so the companies will get their money back that much quicker.

Borrowers can spend the cash on anything they want, including holidays, cars, or indeed to save or invest. Most schemes charge a fixed interest rate. Rates work out at 8.2 per cent and 8.25 per cent with Northern Rock and Norwich Union, respectively.

People themselves may not have to worry about interest, which only falls due for repayment when they have died - or gone into care. But their families lose out, because they would normally expect to inherit the house - and it makes sense to consult them. What is more, costs can be higher than people expect. Age Concern's excellent booklet on the subject stresses that even 7 per cent interest, rolled up for ten years, will double the original debt.

The loan itself is for a fixed sum. Enthusiasts will tell you brightly that if you have a stake in the house, you can always borrow more, as house prices rise. Admittedly insurers normally want a five year gap between applications. Meanwhile, as you get older, you can borrow an increased percentage of the property's value.

That is fine if house prices go on rising. But they can drop, as they did, dramatically, in the late 1990s. Falling house prices, and interest rolling up fast on the original debt, could just possibly ensure that over time the debt would be worth more than the house.

Good schemes will contain a clause preventing the company from collecting back more than the value of the house, whatever happens. Pensioners taking out the Norwich Union roll-up scheme can go further. They can pay a premium of between one to one and a half per cent of the property's value to guarantee that whatever happens to prices and rolled-up interest, they will always have at least a 25 per cent stake in the value of their house.

"The schemes can be attractive for the right people, but they are not the automatic answer for every pensioner," says Justin Modray, of independent financial advisers Chase de Vere. "If people have so little income that they are collecting means-tested social security benefits, the plans may just ensure their own income replaces what the state would provide otherwise."

"In some schemes people will have to repay their loan if they move house - perhaps because they need long-term care. Finally, one or two plans may force you to invest the funds which you have borrowed in their investment plan."

The crucial point is to see an independent financial adviser, for there are any number of small but important differences between the schemes on offer. One trade group SHIP, which stands for Safe Home Income Plans, has a code of conduct, and limiting yourself to member companies makes enormous sense.

Some groups offer straight reversions - where they buy 50 per cent of your property or perhaps more. They cannot claim it until you, or you and your partner, have died. These types of arrangements normally pay out between one third and a half of that 50 per cent in cash, according to Cecil Hinton, one of the best know specialists in the field. Meanwhile, potential increases in value go to the company and people remain responsible for repairs.

One scheme from NPI will prevent people taking out the plan at 70 from receiving more than half the money available as a lump sum. The rest has to go into an income. Even people starting at 80 have to take 40 per cent of the money available as an income. NPI comes under official regulators like the Financial Services Authority, but some smaller companies do not. It makes sense to avoid non-regulated firms.

In the past straight income plans were popular. They allowed people to borrow a proportion of their property's value. The proceeds went into an annuity - an income for life. Once companies had deducted the interest for the loan (on which tax relief applied), pensioners received what was left. Alas, all the virtues have gone. The tax relief has disappeared and annuities are at their lowest level for half a century.

Ways of turning houses into cash, while continuing to live in them, look good. But anyone who likes the idea needs to see an independent financial adviser before making any commitment at all.

'Using Your Home As Capital', Age Concern, £4.99;

Age Concern, 020-8765 7200;

Safe Home Income Plans (SHIP), 020-8390 8166