Equity release schemes are making a comeback after three years of poor sales. A total of 5,812 plans were taken out during the first three months of this year, 4% more than the first three months of last year. Equity release is raising money from your home if you are over the age of 55. The money can be received as a lump sum or as an income.
Generally, there are two types of equity release schemes. The first is called a lifetime mortgage, which allows home owners to take out a mortgage and make no payments during their lifetime. The mortgage is paid off on the homeowner’s death or is paid by the borrower selling the property. The second option is when the home owner takes on a home reversionary scheme. This takes place when a home owner sells part or all of their property in exchange for an income or cash lump sum. This plan is less popular and only makes up 5% of the market. I suppose this is due to the fact that once you have committed to the reversionary scheme, there is no going back. Also, unlike the lifetime mortgages, you will not benefit from any increase in the value of your property if you have sold 100% of it. However, these plans do have something for the older homeowner who wants to maximize the amount of money they want to raise. Also, sometimes by selling, say, 50% of their property at least they are sure that 50% will pass on to their estate, whereas with a standard lifetime mortgage the amount of equity left on death is not known. It is subject to the vagaries of house price inflation.
The recent statistics mentioned earlier have shown that lifetime mortgages are getting a second wind. I believe this is the case for a variety of reasons. Firstly, I think pensioners are finding it very difficult to cope with inflation as utility bills, in particular, are rising, and in many cases at a rate higher than inflation. The index used to gauge older people’s inflation, the Silver Index has been rising at 5% above inflation for the last three years. Secondly, I think people who have retired in the last few years, who have made reasonable provisions for retirement are getting caught out by the effect of the financial crisis and are finding it impossible to get the 5% interest rate in their savings which they had planned for. Typically, if inflation is high, interest rates rise to compensate. However, as mentioned earlier, due to the unique set of circumstances this is not happening. So the savers relying on income have to squeeze themselves further and take the hit. If this is not possible people start eating into their savings that they know will potentially disappear eventually, with the rates they are currently receiving.
Finally I believe that although many pensioners do manage to cope on a day to day basis, as time goes on they do find it more and more difficult to commit to larger expenditure. For example, they may have modernised their house when they retired at 60 but 15 or 20 years later the house is looking tired and they need to renew the car. Unfortunately, they now find it much harder to commit large sums of money to improve their situation. As in the first two examples, I feel that for some equity release could be the answer in such a scenario.
The equity release market has become increasingly innovative with enhanced lifetime mortgages now available for people with health problems which allow people to borrow more. Most plans also give you the peace of mind that no matter what happens; you have a non-negative equity guarantee. This means that if you owe more that the value of your house when you die, then your family will not have to find the difference. In addition some schemes have evolved to ensure that a specific percentage of your property value is safeguarded on death, ensuring your family will inherit a part of the property, regardless of property fluctuations.
I believe equity release offers significant advantages to the home owners that are over 55. However, it is a complex area and it is imperative to take independent financial advice to ensure that the product is suitable for you. Kieron Bassett Financial Services has two Independent Financial Advisers. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit our website at www.kieronbassett.com.
Kieron Bassett CertPFS
27th April 2011
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