Thousands of older people are remortgaging or partially selling their home to provide extra income when they retire.
Schemes known as equity release allow anyone aged over 55 who has paid off their mortgage to use their home to raise cash. But consumer organisations warn that many people may be better off considering other ways to raise money from your home.
How equity release works
There are two main types of equity-release scheme. Lifetime mortgages, the most popular, allow you to borrow money against your home with the loan and interest paid when the home is sold. With the other type of scheme – reversion plans – you sell your home or part of it to a company. When the home is sold, the company takes its percentage of the price.
Both schemes have advantages and disadvantages. So before signing up it’s essential to understand the implications of taking a loan or selling part of your home.
For instance, it’s a good idea to discuss your plans with your family. While few children demand that parents leave them their property, they may have expectations that need to be dealt with. Explaining your financial needs now to your family members should get their support. In other words, tell them the money raised from your home should help you to have a decent standard of living in retirement and maybe a good holiday or two.
It’s also worth talking to an independent financial adviser (IFA) to get the full story about equity release. You need to find out some important details, such as what would happen if you wanted to sell your home and move into a new house or to a care home or sheltered housing. It’s crucial to find out what penalties there would be if you changed your mind and wanted to repay a lifetime mortgage early. It’s also important to get legal advice and make sure you understand how equity release could affect your benefits or tax credits.
A word of warning
Don’t be hesitant about taking a second opinion. Some financial advisers may be keen to push you into equity release because of the commission they can earn. Indeed, the Financial Services Authority (FSA), the City watchdog, warned earlier this year that some advisers are pushing pensioners into the deals when there could be alternatives that wouldn’t mean mortgaging their property.
The FSA sent its investigators out to advisers to find out whether they were being truthful with people about the benefits and downsides of equity release. The FSA said that standards were unacceptable concerning some advisers who did not understand how lifetime mortgages work.
We remain concerned over the variable quality of advice provided, said Clive Briault of the FSA. Customers for lifetime mortgages are typically older and potentially vulnerable, so firms need to take particular care to ensure that suitable advice is given.
The problem is that many advisers spend most of their time selling insurance or sorting out mortgages and so may not understand the complexities of equity release.
Specialist advisers Key Retirement Solutions warned that salespeople who dabble in lifetime mortgages are putting elderly people at risk. We are aware of firms that really dont know what they are doing when it comes to equity release, and I firmly believe that they should not be allowed to continue offering dangerously substandard advice, said Colin Taylor of Key.
Consumer watchdog Which? went even further in its criticism, warning that equity-release plans are expensive, inflexible and severely limit your choices later on in life.
The organisation says there are better ways for older people to raise money.
Which editor Malcolm Coles said: “If you’re over 60 and worried that your pension won’t be enough to live on, an equity-release scheme might seem like a good idea. However, think long and hard before committing to one of these high-risk products. Lenders want to sell a lifestyle dream, but the reality can be very different. It could turn into a financial nightmare that can stay with you the rest of your life.
Finding the right scheme
For anyone who has exhausted all other money-raising options, an equity-release scheme could be the answer, according to a leading age-related charity. Age Concern said: “These schemes can be appropriate for the typically asset-rich, cash-poor homeowner, for whom alternative solutions such as trading down are not viable.”
So how do the two different schemes work? Lifetime mortgages are loans secured against the value of your home. You don’t have to make any repayments on the mortgage during your lifetime, but interest is added throughout the life of the loan. The money – plus accrued interest – must be repaid on your death, or if you need to go into long-term care.
You are normally only allowed to borrow against a fairly small percentage of the value off your home – less than half – so that if property prices collapse, your estate will still be able to repay the debt by selling the property.
Home reversion plans allow you to sell a percentage or all of your home in exchange for a lump sum and a lifetime lease. You remain in the property rent-free for life and then when it is sold, the lender takes its share, whether it is all the property or a percentage of the value. With property prices rising, this can be very lucrative for companies. For example, they could pay £25,000 for 25 per cent of a £100,000 property. But if the property is worth £300,000 when it is sold, the home reversion company will be due £75,000.
Finding out more
If you want to find out more about lifetime mortgages or other equity-release schemes, make sure you talk to experts and check that an adviser is a member of SHIP (Safe Home Income Plans) – see contacts.
Age Concern has a free guide ‘Using Your Home To Improve Your Finances’ and specialist adviser Key Retirement Solutions offers a free guide to equity release – see contacts.
