The numbers of people releasing all or part of the value of their house is growing fast. The recent housing boom, which added billions to the value of properties across the UK, has given many older mortgage-free homeowners instant nest-eggs worth thousands of pounds in the form of equity tied up in their homes.
‘Ski-ing’ or ‘Spending the Kids’ Inheritance’ is a growing phenomenon, with only the mean-spirited daring to complain.
This, coupled with the ‘live fast, die much older’ phenomenon, means many older homeowners are looking for a way to plump up retirement income and generally boost quality of life.
Rising popularity
A recent survey by IFA Key Retirement Solutions showed that after continued strong growth there are now 97,200 equity release plans outstanding worth £4.27 billion.
This is still less than 1 per cent of the whole mortgage market to put things in perspective, but slowly more and more people are recognising their potential.
“These figures provide further confirmation of the strength of demand for equity release,” says Dean Mirfin, business development director of Key Retirement Solutions. “Equity release has now been at record levels since July last year. The fact that equity release activity is highest in cities as widespread as Brighton and Sheffield, shows that the popularity of equity release products is not geographically confined, but has wide appeal to equity-rich ‘Middle Englanders’ across the nation. We expect business growth to continue strongly in 2005, as further new providers enter the market, and increasing numbers of people seek to supplement their retirement income,” says Mirfin.
So why the rapidly rising numbers? “Opting for equity release is very much lifestyle driven,” says Mirfin. “People have had good holidays all their lives, and they want to do so after they retire. More people are happy that they’ve chosen equity release, and then tell friends. Our first job is to talk through issues like what they want the money for, and whether it is worth the cost.”
Quality of life
“Equity release schemes enable older customers to draw capital from their property while remaining in their home for as long as they live,” says Nigel Spencer, head of marketing at Norwich Union Equity Release, which offers customers equity release in the form of a lifetime mortgage product and has just launched a home reversion plan too. “They don’t have to make any repayments during their lifetime, so it can be a good way to raise capital, but there are costs and consequences so it has to be a carefully considered move.”
Lifetime mortgages and home reversion plans So what are lifetime mortgages and home reversion plans?
A lifetime mortgage means you borrow against the value of your home, and go on living in the property. You get a tax-free lump sum. But instead of repaying the loan, interest at a fixed or capped rate is compounded and repaid from the eventual sale of your property. So over the decades, the total can wipe out the value of your property.
A home reversion plan, on the other hand, allows you to sell part, or all, of your home for a cash lump sum which you can spend or invest. You can live there for the rest of your life and move home when you choose, and the plan provider eventually receives exactly the same proportion of the proceeds of the sale sold by the householder.
However, a home reversion plan, just like a lifetime mortgage, will slash the amount of inheritance you can pass on if this is a concern. But by releasing just 50 per cent of the value of your home, for example, you can guarantee that 50 per cent remains. The amount of money released with these products tends to be higher than with a lifetime or mortgage plan. Many customers prefer home reversion schemes, adds Spencer at Norwich Union, because they need to raise large sums, and want to guarantee that their inheritance will not be swallowed up by interest.
However, your personal circumstances will be central to choosing between a lifetime mortgage and a home reversion plan.
If you have a shorter than average life expectancy, then home reversion may not be the best option because you pay out all the interest at the outset. Lifetime mortgages, on the other hand, become incrementally more expensive the longer you live, as interest rolls up and the cost roughly doubles every decade.
“Brokers will also ask about your tax and benefit situation,” Spencer points out. “The value of your property tends to be excluded from means-tested benefits, but if you turn it into cash then it could affect your benefits. Brokers need to look at attitudes to home ownership and inheritance too, he adds.
Individual attitudes make a difference, Mirfin confirms: “Some people say, ‘I’ve had a mortgage for years, and don’t want another,’ while others say, ‘Giving up ownership of my home is the last thing I want to do.’”
“For many people, this is the last serious financial decision they will make, and involves large sums of money,” says Spencer, “so at Norwich Union, we would only consider applications from people who have taken full financial advice.”
Finding advice
Anyone considering equity release should choose a broker authorised by the Financial Services Authority (FSA) to advise on equity release, warns Spencer.
Choosing a good broker is essential, agrees Mirfin. “There are subtle differences between providers, from the interest rates they charge to the type of property they will let you move into in the future,” he says.
A good broker will scrutinise your financial situation and your property, and always discuss alternatives like moving to a cheaper home first. But as Norwich Union research showed recently, a home – especially for older people, who have typically lived there for decades – is an emotive issue, and some elderly people are reluctant to move.
Alternatives might also include claiming pension credits – 1.7 million UK pensioners currently fail to do so. And you need to talk to your family, since equity release schemes affect inheritance; some families produce extra funds instead.
Many families support their relatives’ decision to release equity, says Mirfin. “We actively encourage our customers to discuss their decision to use equity release to boost their retirement income with their families,” he points out. “With six out of 10 people believing that their parents’ well-being is more important than a legacy, equity release is an option which retired homeowners could consider.
Regulation
While equity release and lifetime mortgage schemes have been regulated by the FSA since last October, home reversion plans are still not regulated. That makes a difference to the consumer, believes Roger Hillier, product development manager with Mortgage Express: “Product information is available on a more ad-hoc basis and certainly not in a consistent form from one product provider to another. Comparing-one reversion plan with another-is not as straightforward as it is with lifetime mortgages.”
“The fact that equity release mortgages are now regulated gives consumers comfort,” adds Jon King, spokesman for equity release trade body SHIP,“and you can also choose a provider who is a SHIP member.” That gives four essential safeguards, King says: the right to remain in your home for life; the right to move house; the guarantee that there will be no negative equity, however much interest rolls up; and the right to independent legal advice.
And as the market matures, says King, lenders like Hodge have now launched flexible drawdown mortgages. That means you can draw just £10,000 now and keep the option of drawing on further sums in a few years’ time. The Norwich Union scheme builds in safeguards if a customer dies unexpectedly, Spencer points out, and returns 90 per cent of the value of the home to the estate if a customer dies in the first six months.
Equity release is a growing market, says Alan Dring, head of sales at Standard Life, and will come into its own when home reversion schemes too are regulated in 2007. “Equity release schemes are ideal for Middle England and people who have property but are short of cash,” he says, “and if there are pension shortfalls, people will find they have an appreciating asset in their property.
“Professionally marketed, equity release is a very attractive proposition.” As equity release schemes move towards regulation, and people who are already enjoying a golden retirement thanks to equity release begin to spread the word, the demand for lifetime mortgages and home reversion schemes can only grow still further
Further information:
For a free and independent equity release booklet, or for more information call Key Retirement Solutions free on 0800 064 7075. www.keyrs.co.uk
