How to raise cash against the value of your home

Many elderly people face a tricky financial dilemma. Their home may be worth tens or even hundreds of thousands of pounds, yet they are forced to scrape by on a tiny income.

This dilemma is sometimes described as asset rich - cash poor. The soaring UK property market in recent years has left the over-60s living in properties worth an estimated £500 billion. But the basic state pension is barely adequate and those who cannot top it up from their savings and investments often find life is a constant financial struggle. A scant reward for a lifetime spent working.

Many mistakenly assume the only possible way to solve this dilemma is to sell their home. Understandably, few wish to take such a drastic step. But there is another solution, which is increasingly popular. A number of financial plans known as equity release schemes allow you to turn the equity in your property into cash in your pocket. It is your money, and it may make sense to use it to improve the quality of your life.

Turning property into cash

Equity release schemes are available from a number of different financial companies, some of them household names. Different schemes work in different ways, but all work to the same basic principle. They allow you to access the untapped wealth in your home to provide an income or lump sum to spend as you wish-without selling your home. Schemes may even allow you the freedom to move home afterwards if you wish.

Put simply, most equity release schemes work by allowing you to borrow money against your home, then repay the loan from the sale proceeds of that property on death or moving into long term care.

These schemes are not for everyone. But careful planning and independent advice can help you decide whether you want to turn your bricks and mortar into much-needed cash.

Why choose equity release?

Equity release schemes are generally only appropriate for those who have passed retirement age and cannot raise money from other sources. The older you are, the more you will benefit, as the money you raise from the scheme will not have to last as long. Those aged 70 and above will benefit most, however schemes are generally available from age 60 onwards.

People use the money raised from equity release schemes for a host of reasons. Many are struggling on the basic state pension and simply want to boost their standard of living. It makes little sense to struggle financially when you own a valuable asset.

Others want the cash for a specific reason, to decorate their home, buy a new car or pay for a dream holiday. Some want to help their loved ones, perhaps by helping their children put a deposit on a place of their own or start a business.

Of course many people still want to leave property and assets for their children and grandchildren. The idea of passing on an inheritance still runs strong. Yet a surprising number of elderly people are encouraged by relatives to enjoy their hard-earned money, rather than saving it for the next generation. 

Not everybody has children waiting to inherit their property. It makes much more sense for those without close family to access the cash locked up in their home and spend it on enjoying themselves.

Finally, some need to raise cash in an emergency. They may have to raise money to pay for the cost of home help or nursing home care if their health deteriorates and they are unable to look after themselves. The state no longer provides nursing and residential home care for all but the very poorest. Nursing and residential homes can cost upwards of £20,000 a year. Equity release can help meet the bills.

What schemes are available?

There are different types of equity release plan offered by a number of banks, insurance companies and specialist lenders. All share the same principle of unlocking wealth in your home to spend as you wish, but they work in slightly different ways.

Home income plans

For years home income plans were the most popular method of raising money from your property. However, they have become less attractive since mortgage interest tax relief (MIRAS) was scrapped in the 1999 Budget. Home income plans allow you to take out a fixed-rate loan against the value of your property. You then use this loan to buy an annuity, which will pay you a guaranteed income for life.

A proportion of this annuity income is used to pay off interest on the loan. The rest you keep to spend as you wish. The capital on the loan is finally repaid when your house is sold. The scrapping of MIRAS means that tax relief is no longer available on the interest on the loan. A handful of home income plans are still available from a number of providers, and you should take independent financial advice to see whether this method best meets your needs.

Home reversion schemes

Under a home reversion scheme you sell part or even all of your property to a specialist company and use the money raised to buy an annuity income for life. Alternatively, some schemes may allow you to receive a lump sum payment instead, which you can invest or spend as you wish. You may even be able to take a combination of lump sum and annuity. As with all equity release schemes, you have the right to continue living in your home until death. However, in this instance you will be a tenant rather than the owner of your property. You will nevertheless still be liable for the cost of maintenance and repairs. Plans can be transferred to subsequent properties.

You will not receive the full value of your home under the scheme, because you have the right to live in the property for the rest of your life. The money the company will pay will depend on how long it expects you (and your spouse or partner if you have one) to live after signing the agreement. The older you are, the more you will receive for your house. As women have greater life expectancy, they usually receive less than men. Expect to get typically 40 per cent or 50 per cent of the value of your home. When the property is sold after your death, the home reversionary company will get a share of the proceedings, according to the share of the property you sold. If you sold all your property, it will get the full proceeds of the sale.

Some schemes guarantee that if the plan holder dies shortly after the scheme is set up, their estate will receive money for a minimum period, typically five years.

Home reversion schemes usually require a minimum property value of at least £40,000. People living in parts of the country where property prices are low may face problems meeting this requirement. They will have to consider other options such as a home income plan. 

Mortgage plans

The final type of equity release plan, sometimes known as interest-only mortgages, allows you to borrow a percentage of the value of your house at a fixed or variable rate of interest.

You can receive a cash lump sum or use the loan to buy an annuity to provide an income for life. You then have the choice of using some of this annuity to repay interest on the loan each month, or allowing the interest to roll up over the remainder of your life and repaying it from the eventual proceeds of your house sale. If you choose the second option you will receive a higher income as you will not have to repay any interest from your annuity. However, the interest will roll up for as long as you live, and could eat up most of your estate at death, particularly if you live for many years after taking out the plan.

This type of plan is available from some well-known high street banks and insurance companies. The advantage of these plans is that they allow you to benefit from any increase in the value of your home. The drawback is that your interest bill could wipe out much of this increase. This could leave your loved ones little to inherit if you live for a long time after taking out the plan. As added security, most plan providers guarantee that the final debt you must repay from your estate will never exceed the sale value of your property.

Is it right for you?

Your house is almost certainly the most expensive asset you own and you are likely to have a large emotional as well as financial stake in your home. You must therefore consider carefully any decision you make. Releasing equity from your home generally involves handing part of its value to a third party. On some schemes, you will give up all ownership rights, although will still be able to live there.

Questions to ask

To ensure that an equity release scheme is suitable for you, consider the following questions.

1. Age.

The older you are, the better you will fare. It sounds brutal, but the shorter your life expectancy the more you will receive when you use the released equity to buy an annuity. You should be at least 60 years old, preferably 70 or older.

2. Mortgage.

You normally must have cleared your mortgage and have full ownership of your home. If you have a joint mortgage, both partners must agree on the scheme.

3. Property.

Your property must be in reasonable condition with no major structural problems, otherwise scheme providers may be reluctant to take on your property. They do not want to end up with an asset they cannot sell.

4. Benefits.

If you receive any means tested state benefits, these could be assessed against an equity release plan, and you could lose them. Although there are plans which pay a regular income rather than a lump sum which may be more suitable. Check your entitlement carefully.

5. Protection.

Does your chosen scheme pay a guaranteed sum if you die shortly after taking out the plan-or set a limit on how much your estate must pay if you live for many years after?

6. Alternatives.

Do you have any other assets or investments that you could use to boost your income. Consider taking independent financial advice to help pinpoint and exploit any alternatives.  

7. Family.

Would your children or other relatives be able to help you financially? You could reimburse them from the sale of your property after death. Be careful, however, as transferring assets between family members could open you to a tax bill. Again, specialist advice should be sought.

What next?

Unlocking capital in your home is a major step. There are many personal and financial issues to consider. The range of different plans available from different companies makes the picture seem even more confusing. Do not take such an important decision without first seeking an independent financial adviser who specialises in this area.

You should also talk to those family members close to you. Their financial interests are also at stake. They may be required to sacrifice a large part of their inheritance if you opt for an equity release scheme. It is best to tell them your plans, so the news does not come as an unwelcome shock later. 

Protection

To protect the elderly, many providers of equity release schemes have joined a voluntary body called Safe Home Income Plans (SHIP). Member companies subscribe to the SHIP Code of Practice.

Remember that if you release your equity from your home you are still responsible for insuring the house and for payment of all household bills.

Note: Harrison Townend & Ormeshers are only authorised to advise on mortgage type equity release schemes at present and have applied to the FSA for authorisation on home reversion schemes.

 
Further information and advice.
 
If you would like help in considering if equity release is the right solution for you, please contact our independent financial adviser:- Chris Cunliffe ALIA(dip) Tel: 0161 368 1559  E-mail: webmail@harrisontownend.co.uk
 

Authorised and regulated by the Financial Services Authority. Regulated by the Law Society. Nothing in this web site constitutes legal or investment advice or a recommendation by Harrison Townend & Ormeshers or any of it's employees. You should always seek independent financial advice before making any investment decisions.