Getting older is inevitable but given this fact, very few of us are financially prepared for it. Research published in August 2007 by financial services company, Edward Jones, revealed that 12 per cent of those aged over 55 have not yet begun to save for their pension. However, relying on the basic State Pension which, for the tax year 2007-2008, is set at a paltry £87.30 a week for a single person and £139.60 a week for a couple, could be a risky business.

By contrast however, the value of average property in the UK has gone through the roof, rising by a staggering 189% just in the past 10 years, according to the Halifax House Price Index. This means that, while there may be millions of retired homeowners in the UK who are cash-poor, they are also asset-rich. Equity release schemes basically aim to mix these two circumstances together and come out with a workable average.

What is equity release?

An equity release scheme, as the name suggests, allows homeowners to release equity in their home. You can do this by either selling or borrowing against a proportion of your property in return for a cash lump sum or income. The unique selling point of equity release schemes is this will never be your problem while you are alive.

For example, if you want to take a loan against a proportion of your home with a lifetime mortgage, you will not be required to make repayments during your lifetime. Instead the loan will be repaid when you die or sell the house as a result of going into a care home.

Similarly, if you want to sell a part of your home using a home reversion plan you can live in the property, without paying rent on the proportion of it you no longer own, for the remainder of your life or until you die or go into a care home.

According to figures from equity release industry body, SHIP (Safe Home Income Plans) a massive 95% of the £1.2billion equity release turnover was attributed to lifetime mortgages during 2006. And equity release specialist IFA, Key Retirement Solutions, says that sales of home reversion plans currently only make up between 6% and 8 % of its total business.

Where can I arrange an equity release scheme?

When it comes to raising cash in retirement, the right equity release scheme can offer a feasible and practical solution - especially in the case where there are no children or your children are in the position where they would not suffer from a lack of inheritance.

While Read IFA does not offer the schemes, their panel of specialist advisers will be able to tell you if equity release is the right course of action, rather than unlocking your pension, and put you in touch with a trusted company that can assist further. There are currently around 20 different providers of equity release schemes, creating an increasingly competitive market.

What are the criteria?

Regardless of which type of scheme you opt for, you will have to meet certain qualifying criteria. For example, you will need to own your home outright, which should typically be worth at least £50,000 and then be looking to raise a minimum of between £25,000 and £30,000. Homeowners must be aged at least 55 but no older than 95, have no tenants in the property and a desire to stay there for as long as possible. To provide adequate security, the property must be made from conventional bricks and mortar and be in good repair.

How does each scheme work?

Lifetime mortgages typically allow homeowners to borrow between 20% and 50% of the open market value of their property. This older you are, the greater percentage you will qualify for. When the money is released, it can be as a cash lump sum or as a monthly income - but in either case, it is tax-free.

Most lifetime mortgages are now payable at a fixed rate of interest. But these can vary in price considerably, so it's a good idea to seek independent financial advice before making a decision. Interest rates on lifetime mortgages are linked to swap rates (the rate at which banks lend to each other) rather than the Bank of England base rate.

Bear in mind the interest on these loans will have a compound effect for an open-ended amount of time. But if you use an equity release provider that is a member of SHIP you will have a guarantee that, if you live longer than expected, your home will never fall into a state of negative equity.

Whatever amount you end up owing, it will repaid to the equity release company when you die or go into a home and sell the property - which must usually be within a year of either event.

Home Reversion Plans allow homeowners to sell a proportion of their property, but in this case, they will be able to extend up to 100% of its open market value. The final proportion again, will depend on your age, health, sex and therefore likelihood of dying. As with lifetime mortgages, funds released are tax-free and can be paid either as a cash lump sum or a monthly income.

As a home reversion plan is a 'sale' rather than a mortgage, the equity release provider cannot charge interest. Instead, homeowners are paid a significantly reduced rate for the proportion of the property they are selling than they would net on the open market. Typically this is anywhere between 30% and 60% of its value.

For example, this means, if you wanted to sell 50% of your property that is worth £300,000 you would receive just £45,000 (that's 30% of 50% of the value at £150,000). However, this is also where the cost ends as the rent payable on the part of the property you not longer own, as well as any related arrangement fees, are already accounted for.

What are the pros and cons of each scheme?

When you opt to take a lifetime mortgage, the main advantage is that you can still benefit from price rises on the full value of your home. Although past performance is no indication of future performance, house prices have tended to withstand the test of time, having risen by a staggering 189% over the last 10 years according to figures from Halifax.

Lifetime mortgages also present homeowners with the option of leaving some funds, for which they are eligible, in a 'drawdown facility'. This means the money is there for the taking but interest only starts to apply at the point when they are accessed.

The downside to lifetime mortgages is that they really are for life. If you come into some unexpected money and want to redeem the loan, providers may charge hefty penalties. Remember also that the interest you pay won't change from the day the scheme is taken. Therefore, if interest rates fall over the course of your lifetime you could end up fixed into long-term borrowing that is uncompetitive.

To understand the features and risks of a lifetime mortgage, ask for a personalised illustration

When it comes to home reversion plans, the main advantage is that you can be sure of how much inheritance you will be leaving to your children. Furthermore, selling part of your property can also reduce or even eradicate Inheritance Tax liabilities. However, this does only apply if you die after seven years of completing on the plan. But while you are alive, 'owning' less in property terms may also put you in a stronger position when it comes to being means tested for care homes.

On the other side of the coin, psychologically, a home reversion plan puts you in the position where you no longer 'own' your own home - and despite this, you will still be solely responsible for 100% of its maintenance and repairs.

Whichever scheme you opt for, bear in mind that any cash lump sum could affect your entitlement to any benefits you may be receiving.

Are these schemes regulated?

Lifetime mortgages came under the regulatory hammer of the Financial Services Authority in November 2004 when most types of mortgages were regulated. Home reversion plans came under regulation in April 2007.

Where can I get more information?

For more information on equity release schemes, or a list of industry-endorsed providers, visit the SHIP website at www.ship-ltd.org.

The information in this article is intended only for information purposes and not as advice on your own situation because it may not be appropriate for you. If you are unsure whether something is suitable for you then you should seek advice from a relevant professional.

 

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