|December 2012It is reported that one in four homeowners have no plan in place for their retirements. Millions have little by way of savings and minimal pension pots. One in three households are said to have less than £250 in accessible savings.
For many, the house is seen as the main store of wealth which will be realised in later life. This might be by selling up and moving to a smaller property or even by getting your own back on the kids and moving in with them. For some however, the option of staying put but using the value of the home could be an option.
This conversion of homes into income of course has a set of products designed for the purpose of “releasing equity”. In essence, older home owners are granted rent free, life “tenancies” of their homes in return for secured loans which “roll up” interest or for “selling” a slice of the equity. Such a transaction is not to be taken lightly: it is a lifetime commitment which reduces the value of the estate (which the family needs to understand) and, usually, has penalties for early repayment.
There are two main variants of equity release; lifetime mortgages and home reversion plans. Lifetime mortgages add compound interest to the tax free sum released. For the youngest customers (around 55) this might be 15% of the home’s value. This rises to around 50% for older borrowers or those with some medical conditions. Home reversion plans operate by selling a share in the house at a discount. In return the provider will give an income for life. However unlike lifetime mortgages the provider will take their share of the sale price of the house. If the value of the property rises, this increases the return to the provider. This is also true if you died soon after entering into the arrangement. Like lifetime mortgages, the proportion of equity which can be accessed increases with the age of the customer.
Overall around £1Bn of equity release is expected in 2012 through these types of arrangements. As retirement provision falls it is expected that such a market will become even more common.
Clearly equity release has its place but any homeowner considering it should carry out plenty of research and seek good independent advice, perhaps through a broker or IFA. Two useful points of reference are the FSA and the industry’s own Equity Release Council.