To put it bluntly, when it comes to retirement, much of the UK population is up the creek without a paddle. Recent research conducted for consultants Deloitte & Touche revealed that only 23 per cent of British adults think their pension arrangements will fund their retirement.
However, rising house prices have made cash-poor pensioners property-rich. So this – coupled with the ever-decreasing stigma of ‘borrowing’ – is why equity-release schemes have been taking the UK by storm. In fact, according to Deloitte’s research, nearly half (45 per cent) of the population would now consider taking a scheme to see them through retirement.
Which scheme should I go for?
No form of equity release is cheap, so looking at other alternatives first is a good place to start. “Existing savings should be called upon before considering equity release,” advises Mike Lewis at the Help the Aged Equity Release Service. “Or you could move to a smaller home, which could be a more suitable and more cost-effective option in the long run.”
If you still want to go ahead, consulting your own independent adviser before approaching any equity release provider is crucial. It’s also wise to consult your family to avoid any ‘nasty surprises’ for them in the future.
Generally if your objective is to release as much cash as you can, a ‘home-reversion plan’ is the best option, says Dean Mirfin, business development director at equity release broker Key Retirement Solutions.
This route will also ensure that there will be at least something to leave to your children. What is an equity-release scheme?
Equity release schemes are designed to provide mortgage-free retirees with either a lump sum or an income from the equity – or cash value – in their home with no repayment during their lifetime. Currently there are two types of scheme available: lifetime mortgages and home reversion plans.
The lifetime mortgage
A lifetime mortgage allows you to take a mortgage from an equity release pro-vider against a certain proportion of your property. Typically firms lend between 25 and 50 per cent of the value of your property. No repayments are made on the mortgage in your lifetime – hence the term ‘lifetime mortgage’.
Typically the interest for the whole term of the loan is set at a fixed rate, which is usually higher than the average mortgage interest rate. The chances are that the rising value of your property should counterbalance the interest that accrues on the loan. When you die – or if you move into a care home – the loan is repaid from the sale of the property. Usually this has to take place within a year.
The effect of the compound interest means that by the time the loan is repaid, it could potentially amount to the whole value of the property. However, providers registered with the industryÂ’s regulatory body SHIP (Safe Home Income Plans) will never ask for more than the propertyÂ’s open market value at the time of sale.
- How much can I borrow? – “The older you are, the higher the amount you can borrow relative to the value of your property,” says Mirfin, “because as your life expect-ancy is shorter, the company will anticipate getting a quicker return on its money.”
- What costs are involved? – Like any other mortgage, you do have to pay an arrangement fee in the region of £500 and legal fees of around £400. A valuation fee will also be payable. Some lenders will refund or contribute to these costs.
The home-reversion plan
Under this alternative scheme you sell rather than mortgage a portion of your property to the home-reversion firm. You will be able to sell anything from 25 per cent of your property (as long as this amounts to a minimum of 25 per cent subject to criteria) up to 100 per cent. When you die or if you go into a care home, the property is sold and the company will claim back the same percentage of its new value, plus any price growth.
What costs are involved? – You will not get anywhere near the market value of the percentage of the property you are selling. In fact it will only be in the region of between 30 and 60 per cent, although you will theoretically be living rent-free in the property.
With a home-reversion plan, any administrative charges will be factored in to the amount of cash you are paid. However, you will have to pay for a valuation upfront.
