MAKE BRICKS AND MORTAR PAY

You live in a house worth a small fortune but you need money – either to boost your income or to pay for something expensive that you cannot afford. So why not convert some of that value into cash to use while you are alive rather than leaving it to others when you die? It is called ‘equity release’. It is not a solution that appeals to everyone – there may be alternatives and there are some groups who should not consider it. But if you are fully aware of what is involved then equity release can provide the best answer to a shortage of cash in retirement.

Lifetime mortgages
There are two ways to raise money from the value of your home. The product that has come to dominate the market is called a lifetime mortgage. You borrow an amount of money secured against your home. The money is yours to do what you like with – anything from a cruise to a hip operation or just to draw down to boost your income. The lender charges you interest on the money you have borrowed at a rate fixed for the life of the loan. The interest is added to the loan each year and the loan and interest are repaid when your home is sold either on death or when you go into long-term care.

The maximum you can borrow will be a lot less than the current value of your home because the company must wait many years to get its money back. Table 1 gives a guide to the maximum percentage of your home’s value you can borrow with a lifetime mortgage. The actual amount will depend on the company you choose.

Source: SHIP

So if you are a couple aged 70 with a home worth £200,000 you could borrow a maximum of 30% or £60,000 against it. You can always borrow less, though there will be a minimum. Today the average equity release interest rate is 6.5% fixed for the life of the loan. At age 70 a man has a life expectancy of about thirteen and a half years and a woman just under sixteen years. But if you live much longer than that – about nineteen years – the loan and rolled up interest will be worth as much as your home was when you started. Over the last nineteen years house prices in the UK have risen by 161%. If that happens over the next nineteen years then your £200,000 home would be worth £522,000 and the loan total would be £198,500 leaving plenty of equity to pass to your heirs. Of course, over the last couple of years house prices have fallen. If they do not rise and you live nineteen years or longer there would be nothing left for your heirs. However, all lifetime mortgages sold by members of Safe Home Income Plans (SHIP) guarantee that the total loan will never exceed the value of the home. So your home is never at risk while you are alive. You should only consider products which have this ‘no negative equity’ guarantee.

Modern lifetime loans are flexible. Although you agree to borrow up to a certain amount you normally draw some of it at the start and take the rest as you need it. Interest is only charged on the money you have taken. Some also allow you to pay chunks off the loan if you come into some money.

Home reversion
The other sort of equity release product is called a home reversion scheme. You sell a share of your home for a cash sum. For example you might sell half. You will be allowed to live there for life but will be required to keep it in good repair. When you die or go into long term care your home is sold and the company gets half the proceeds. The rest is yours – or left to your heirs.

You will get a lot less than the market value of your home because the company will have to wait many years to get anything back. Table 2 gives an idea of what percentage of the value of your home you might get if you sell it all. You might choose instead to sell less than all of it. If you sold half then you would get half of these percentages – so 24% for a 70 year old man.

Source: Bridgewater

The advantage of a home reversion scheme is that you always know what proportion of your home’s value you have sold. If you sell half then you know that the other half will be left for your heirs. It also means you can go back for more as you get older. For example a couple might sell half at age 70 and get 19% of the value of the property. Ten years later when one partner has died, the surviving wife could then sell another chunk. By then the value of the home could have risen and, ten years older, she would get a bigger proportion – 56% of the half she still owns or 28% of the whole property value.

Alternatives
If you need money for house repairs your local council may be able to help you either by a grant or a loan. If you need a small amount of money a secured loan over a fixed period which you repay out of your income might be a cheaper way to raise it. You should also make sure you have claimed all the benefits you are entitled to and traced any old work pensions you may never have claimed.

If you still want to release capital the least costly way is to sell your home and buy somewhere cheaper. But you will have to pay fees for estate agents and lawyers, stamp duty land tax on properties bought for more than £125,000 (£175,000 until 31 December 2009), and the cost of removal. Many retired people move away from their friends and familiar environment only to regret it as they become older and more infirm. 

Dangers
If you get pension credit or council tax benefit then any capital you raise from your property can mean that benefit will stop or be severely reduced. From 2 November you can have up to £10,000 capital without affecting these benefits. Since April 2009 pension credit is not normally reduced if you take out equity release above the age of 75, but get advice as the rules are complex. In some circumstances that also applies to council tax benefit.

What should you be told
You should only buy an equity release product from a specialist financial adviser who is a member of SHIP. That ensures they have good qualifications. Your adviser should ask about your expenditure, income and capital and why you want equity release. Alternatives should be discussed pointing out the advantages and disadvantages of each. They should also explain the arithmetic, the effect on benefits, and what will happen if you move or go into a home. The adviser will charge a fee and there will be legal and other costs to pay. Be wary if the adviser suggests an investment to produce an income from the capital you raise.

Relatives will normally be glad you are using the value of your home to make your life better. However, it is only fair to tell your heirs what you are doing – and your executors where the paperwork is. Most equity release products allow you to move home but there may be restrictions. If you have to go into long term care and your home is left empty then the equity release deal will come to an end and the property will normally have to be sold.

Lifetime mortgages and home reversions are both regulated by the Financial Services Authority and complaints can be dealt with by the Financial Ombudsman Service.

Further information
Home improvements: www.houseproud.org.uk 0800 783 7569 or www.foundations.uk.com 01457 891909
Safe Home Income Plans (SHIP): www.ship-ltd.org 0844 669 7085
Government advice: www.moneymadeclear.fsa.gov.uk/products/equity_release/equity_release.html

October 2009