Is now the time to release equity from your home?
Equity release has had a bumpy couple of years, with the credit crunch and falling house prices forcing some providers to exit the market.
But while this has affected the choice that's available, it remains a viable retirement income option for many people.
A report from the Pensions Policy Institute – Retirement income and assets: outlook for the future – highlights this.
It predicts that future pensioners will need to look to a greater variety of assets, including housing wealth, to support retirement.
Andrea Rozario, director general of Safe Home Income Plans (Ship), the trade association representing equity release providers, agrees. "For many people, the home is the biggest asset. It needs to be part of the retirement planning mix," she says.
Equity release options
The first behaves like a standard mortgage, allowing you to borrow against the equity in your home. Interest is charged, which can be paid on a monthly basis or, more commonly, deferred until death, repayment or you move into a nursing home.
The amount you can release will depend on your age, health and the value of your property, subject to a minimum of £10,000.
As an example, LV= will allow someone to release up to 20% of the value of their property at age 60, with this increasing gradually to a maximum of 50% at age 90.
You don't have to release all the equity at once either. For instance, Aviva has a plan that sets a maximum drawdown amount, allowing you to take the remainder whenever you like.
"Interest is only charged when you take the money, which makes this plan increasingly popular," says Dominic Fraser-Smith, the at retirement manager at Aviva.
Interest rates are usually fixed for life, and can vary from 5% to 8%, so your debt could grow significantly. An interest rate of 6% means your debt doubles every 11 or so years, while a rate of 7% will see it double within 10 years.
Most plans have a "no negative equity" guarantee to offset this, ensuring you’ll never owe more than the value of your property.
The other type of plan, the home reversion, is available from age 65 and allows you to sell all or a share of your home in exchange for cash and a right to live there rent-free for the rest of your life.
The amount you'll receive is dependent on your age and sex, and that of your partner if you want them to remain in the property should you die first.
Peter Welch, head of sales and distribution at Bridgewater Equity Release, says it can be a good option. "You know exactly where you are with a reversion plan.
You don't have future debts, and if you only sell a percentage of your home you can come back for more or leave an inheritance," he explains.
"If, however, you're in poor health or you think house prices will rise then home reversion probably isn't right for you."
Although equity release is useful for many retired people, the market has suffered a number of setbacks. For starters, the property market hasn't been kind.
As future prices come into the calculations, the fall, and subsequent stall, of house prices has affected both types of product.
Nigel Hare-Scott, managing director of Home & Capital Advisers, says this means loan-to-value percentages have fallen on lifetime mortgages, with the situation worsened by the credit crunch, which pushed interest rates up.
"More significantly, the fall in property prices means the amount you can release has fallen too," he explains.
However, providers argue that this hasn't hit customers too hard, especially as many have already seen the value of their homes increase substantially.
Vanessa Owens, head of equity release at LV=, adds: "We’ve always been very conservative about house price projections, and although the fall in property prices put some people off, the demand is still there and increasing."
Another setback for the market was the publication last August of the Which? report into equity release advice. This conducted a mystery shopping exercise and found that two thirds of advisers failed to give full guidance.
Standards are rising though. Both products are regulated by the Financial Services Authority (FSA) and, with many providers members of Ship, there are additional guarantees in place.
These include a no-negative equity guarantee on the mortgage products; the ability to move house without financial penalty; independent legal advice; and the right to remain in your property for life.
Equity release advisers must also meet standards. Rozario explains: "An adviser must have a certificate in equity release and meet the regulatory requirements set down by the FSA.
These require advisers to do a number of things, including carry out a full fact-find and provide details of any fees."
Another positive sign is the launch of debt charity Consumer Credit Counselling Service's equity release advice service.
This was launched in response to a sharp increase in the number of people aged over 60 calling for debt advice.
Although initially restricted to this customer base, its decision not to charge fees for advice, which can be as much as £2,000, could shake up the market.
Tom Moloney, equity release manager for CCCS Equity Release, says: "Equity release isn't right for everyone, and I'd recommend doing some research before you see an adviser.
"It's worth knowing the negatives as well as the positives before you take advice."
Beware additional charges
One area, he says, where you need to be careful is additional expenses. Equity release involves some of the same costs as arranging a mortgage for a property purchase and these aren't cheap.
They include a valuation, costing roughly 1% of the property value; an arrangement fee, averaging around £595; legal fees of up to £400; and advice fees where appropriate.
The charges attached to the plans are important too. Moloney explains: "Early repayment charges differ massively, with some plans charging as much as 25%. This isn't pleasant if you want to switch to a cheaper plan."
If you receive benefits such as pension credit, council tax and housing benefit, these could be affected if you take equity out of your home.
Your savings are taken into account when assessing your benefits, and although the government recently raised the threshold from £6,000 to £10,0000, a lump sum from your home could scupper your entitlement.
This needn't be an issue, Hare-Scott explains: "If you're entitled to benefits, your plan can be structured to avoid your savings exceeding the £10,000 limit. For example, you could go for a drawdown option on a lifetime mortgage."
Most importantly, an adviser should assess if equity release is the right option for you. Other options include moving to a cheaper property, taking a part-time job, using savings, getting financial support from family and claiming all the benefits you’re entitled to.
"A lot of the over 60s don’t claim all the benefits they can," adds Moloney. "Additionally, if you're considering equity release for home improvement you might be able to get some help from your local authority with a home improvement grant.
Equity release isn’t a last resort product, but there may be other easier and cheaper solutions."
This article was originally published in Money Observer - Moneywise's sister publication - in May 2010
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.
Home reversion plan
An equity release scheme whereby you sell part or all of your property to a home reversion provider, in exchange for a cash sum or income and you are guaranteed occupancy for life. On your death, the agreed proportion of the proceeds from the house sale reverts back to the provider and the rest is distributed to family. Although you don’t repay the loan until you die and have lifetime occupancy, the cash raised will not reflect the true value of the part of the property sold and you lose the right to any future growth in the part of the property you sold.