With pensions falling short, an increasing number of pensioners will need to cash in on their property.
Far more hard-up pensioners will turn release equity from their properties to top up their substandard pensioners in the future, according to a new study.
LV= surveyed financial advisers across the country at its roadshows, and found that almost all of those in attendance predicted equity release plans will play a big part in boosting the finances of the nation’s ageing population.
Perhaps most interestingly, almost half of those advisers (48%) pinpointed a shortfall in pension provision as the reason for a jump in equity release plans. Clearly, with so many older people reaching retirement, and facing the prospect of an income not nearly as healthy as they expected, making some extra money from their home - without having to sell up - will be an enticing idea.
But doesn’t it all sound too good to be true?
A ripe market
According to the most recent Pensioner Property Index from Key Retirement Solutions, homeowners aged over 65 own £752bn worth of mortgage-free property.
Of course, many of those homeowners will have a perfectly adequate pension in place, so have no need to consider equity release. But there are lots of pensioners who struggle to get by, yet are sitting on a valuable asset. Making use of that asset could make a significant difference to their quality of life.
After all, with inflation rising so steeply, the cost of living is stretching pensioner budgets to breaking point. According to Prudential, the cost of living for older people is rising at 44% above the current level of inflation, showing just how hard pensioners are hit in times of inflation.
How equity release works
The name says it all with equity release. The plans allow you to release some of the equity you own in your property. So you can get your hands on your money without having to sell the property and move, a bonus for many older people who aren’t keen on upping sticks and settling somewhere else.
The plans come in two forms: lifetime mortgages and home reversion plans.
Let’s start with lifetime mortgages. With a lifetime mortgage, you take out a loan against the property in return for a tax-free lump sum or a regular income, or even a combination of the two. What’s attractive about lifetime mortgages is that you continue to own 100% of the property.
Your lifetime mortgage may work on a roll-up basis, where interest on the mortgage is not paid back on a monthly basis, but instead rolls up over time. Then, when you die or the house is sold, the loan and the rolled-up interest are paid off. Or it may be an interest-only loan, where each month you pay off the interest, so only the loan sum is paid off once the house is sold.
[SPOTLIGHT]The other type of equity release product is called home reversion. This is where you sell a chunk of the property to the plan provider, in return for a lump sum or regular income, while you also get to remain in your home, even if you choose to sell 100% of the property to the provider.
No negative equity guarantee
One of the reasons that equity release had such an awful reputation years ago was that in some cases, after the owners had died, their loved ones were left owing money to the equity release provider, as the amount owed ended up larger than the value of the property.
This is obviously an appalling state of affairs. However, now all plans provided by members of Safe Home Income Plans, the equity release trade body, carry a ‘no negative equity guarantee’ ensuring that in no case will your loved ones ever be left out of pocket as a result of you proceeding with equity release.
The downsides
There are plenty of potential downsides to consider with equity release. With a home reversion plan, for example, while you can sell the full value of the property, you won’t get a great price for it. According to SHIP, the amount you can raise tends to be between 35% and 60% of the market value of the property.
So if you really want to get an accurate price from your home, you’ll either need to remortgage or simply sell up and move to a smaller house.
Meanwhile, with a lifetime mortgage, if you roll up the interest, the debt you owe can very quickly mount up.
And then there’s the fact that these deals can be pretty expensive. For example, a lifetime mortgage from Aviva could see you paying almost 8% on the loan.
Perhaps the biggest downside to an equity release plan is the affect it will have on your loved ones. By going through with a plan you are boosting your own financial position, but as a result the inheritance you plan to leave them will be reduced. Indeed, in some cases, it could result in you not leaving them a penny.
Personally, I wouldn’t have a problem with my parents not leaving me anything if it meant they could enjoy their cash in retirement, but the point is that before going ahead with any equity release plan, it’s really important to discuss the consequences with your loved ones.
Sale and rent back
An alternative to such equity release plans, though often marketed in similar terms, is sale and rent back. These schemes have an appalling reputation, because there have been plenty of shady operators in the market in recent years. The FSA has now taken over the regulation of sale and rent back, but I’d still be very cautious about going for one of these deals.
Check out Good riddance to this property scam for more information about this.
Getting advice
It should also go without saying that finding an independent adviser, experienced in equity release, is a must before going ahead with any equity release plan. Indeed, some providers will only proceed if you’ve received independent advice.
You might like to use unbiased.co.uk to search for advisers in your area.
Equity release is far from perfect, and won’t be right for everybody. But if you’re in retirement and struggling to get by, it makes sense to make the most of the biggest asset you own.