Tougher Equity Release Rules

The Government is pressing ahead with regulations to make sure that older people are protected when they use their home to raise cash. Sales of these so-called ‘equity release’ products are growing rapidly as more and more older people use the value of their home to boost their income in retirement. But only one of the two main products that can be used to convert some of the value of your home to cash is currently regulated. They are called ‘lifetime mortgages’. Now the Government has said it will pass new laws in the next twelve months to regulate the other kind of scheme - ‘home reversions’ – see box.

People over 65 are estimated to be sitting on (or in) more than £1 trillion worth of property. Converting just a bit of that value to cash now is clearly very attractive. Sales of these so-called ‘equity release’ products have reached £1.5 billion in the last twelve months. Ten years ago barely £32 million worth were sold.

But while the popular ‘lifetime mortgage’ products are covered by strict regulations governing who is allowed to sell them and how, the other main product, called a ‘home reversion’ scheme is not regulated at all. That has led to fears of unscrupulous practices and has contributed to the decline in home reversions. In 1998 they accounted for 19 out of every 20 sales. Now that is down to just one sale in 20.

The new regulations will put the two types of scheme on an even footing. Strong competition between lifetime mortgage providers has led to prices coming down. And experts predict the regulation of their rivals will boost sales further. Recently the Institute of Actuaries predicted that within five years 40,000 people a year would cash in on their homes and by 2031 it could be 80,000. John King, the chairman of SHIP (Safe Home Income Plans), a trade body covering nine out of ten companies involved in equity release, told Saga Magazine "we are all delighted with the change and glad it will be so quick."

Lifetime mortgage: you borrow a lump sum from an insurance company. The interest on the loan is not paid. Instead the interest due is added each year to the debt. When you die or move into a care home the total owed is paid from the sale of your home and your heirs get whatever may be left.

Home reversion: you sell a share of your home, for example a half or a third, to the insurance company for a lump-sum. When you die or move into a care home your property is sold and the company gets that proportion of the sale price. Your heirs get the rest.

There is more about using the value of your home to raise cash in Cashing in on Your Home Saga Magazine September 2003.

Scissors cut the deal
If you thought playing scissors, paper, stone was just for children – think again. In Japan they take it very seriously. Recently the sale of a collection of paintings worth more than $20 million depended on the outcome of a single throw of the ancient game.

When the director of the Tokyo¹s Maspro Art Museum, Takashi Hashiyama, decided to sell off valuable western art to boost the museum¹s collection of Japanese ceramics he could not decide whether to give the job to Christie¹s or Sotheby¹s. Both auction houses have thriving Japanese offices and Mr Hashiyama called both in to a sudden death game of Scissors, Paper, Stone. The stakes were so high that he made one rule change: a single word would be written on a piece of paper rather than the usual hand signals (which have been known to change at the last millisecond). Unusually, there was just one round rather than best of three.

Sotheby¹s looked on it as a game of chance and took no advice. Christie¹s however were told by experts of a complex double bluff. Stone seems strong so beginners expect the other side to choose that. So they try to be clever and choose paper, the weakest substance but which of course beats stone. Therefore Christie¹s should choose scissors. And that is how it went, Sotheby's paper failing to wrap up the deal while Christie's scissor won a cut of perhaps £4 million in total commission. The pictures ­ including works by Picasso, van Gogh, Cézanne, Sisley, Braques, Bonnard, and Pissaro ­ are being sold in New York and London over five months from May to October

Bentley's grey target
How many fifty somethings have £115,000 or so to spend on a new car? Bentley Motors certainly believe there are enough to target their new 4-door Bentley Continental Flying Spur at this age group. For years the company has relied on larger vehicles such as the Bentley Arnage T. The massive engine can propel its three tonnes from nought to 60 in under six seconds. But the price tag of £170,000 is as much as the average house – and that limits the market. When Bentley was sold to Volkswagen in 1998 the new management noticed that the market for luxury cars that cost about half that price was also very small, even though far more people have £100,000 in their back pocket than £200,000. So in 2003 they launched the Continental GT and now its four door brother has appeared. Smaller, lighter, and faster the new Bentley keeps the tradition of luxury. For example, Bentley only buys hides for the (compulsory) leather upholstery from continental Europe where cows are not penned in by barbed wire which causes holes in their skin. Footballers love the GT ­ at least seven premier league players have one. But the Flying Spur target market is more the age of football managers. So if you are over 50, have a six figure sum burning a hole in your bank balance and want what the company calls ‘an element of self-reward’ then Bentley is targeting you. Before you splurge every last penny remember that a full tank of unleaded will cost you £77 and last just over 300 miles. And over four years servicing will set you back £2185.

Savings
New savings accounts targeted at older savers pay lower rates of interest than others available to anyone. Several companies have launched savings accounts aimed at what they call the grey market. But none of them makes the top 10 rates of interest you can get without declaring your age!

You can get 5.35% from Alliance & Leicester with its online savings account and you only need £1 to save. Other top rates, all payable from the first pound, are First Direct at 5.2%, cahoot at 5.1% or ING Direct at 5%. These are all phone or internet accounts. But if you have £2500 you can get 5.05% whatever your age if you are near a branch of the Manchester Building Society and open a premier access account.

The accounts marketed at older people are all branch-based and all pay less. Skipton’s Pension Plus pays 4.5% as long as you have £500 to save. West Brom’s Oak account pays 4.25% from the first £10 as long as your pension is paid direct into it. Yorkshire Building Society pays a mean 3.85%.

However, if you are well organised you could try the Sixty Plus Saver from Coventry Building Society. At first sight its 6% on balances of £500 or more seems amazing. But that rate only lasts for a year. After that it will fall back to 4.75%. So if you have a lot of cash –Coventry will take up to £250,000 – it may be worth moving it there for a year. After that, open an internet account and earn at least half a percent more.

Grandmas and pas
give out £4 billion a year to help their grandchildren, a survey from Barclays says. The cost starts early with about a third of the money going on childcare costs for working parents. University does not come cheap either with a similar amount helping grandchildren afford fees and living expenses. Another quarter goes to help grandchildren buy their first home. Altogether one in five families says these gifts are necessary – they depend on this support for grandchildren. Most of the money is paid on an ad hoc basis – giving cash when and where it is needed. But a few, around one in five grandparents, make a regular annual gift and about one in 6 make planned investments for grandchildren. Averaged out over the whole population, grandparents contribute £2303 a year to their families. No wonder they’re called grand!

July 2005

e-mail Paul Lewis on paul@paullewis.co.uk