Using the value of your home to support your retirement

Equity release – the facility to raise cash by taking out a lifetime mortgage against the equity in your home – generates much debate.

Is it a necessary evil to be used as a last resort or a respectable way of topping up one’s retirement income?

Much of the media has been unrelentingly hostile to equity release, arguing that it is an expensive, complex product which rips off the elderly, who may not understand its implications for inheritance or its interaction with state benefits.

These are all valid arguments. Equity release is expensive and the most you are likely to be able to raise is 50% of the value of your property.

Equity release  – some of the pitfalls

Lifetime mortgage interest rates have barely moved over the last 10 years and continue to be charged at around 7% -  a whopping 6.5% over bank base rate.

At 7% a mortgage will nearly double in size over 10 years, meaning that the equity in a property can soon be exhausted. So a couple taking out a lifetime mortgage of £45,000 on a £150,000 property will see their debt nearly double to £88,000 in 10 years and to £124,000 in 15 years.

Then there are the swingeing early repayment charges which lenders levy if the homeowners wants to repay their mortgage early – an eventuality which can easily occur if there is a change in circumstances or the homeowners wants to move home.

Children can also come back to haunt equity release providers claiming  they were not aware that their parents had taken out a mortgage against their home, effectively denying them of a large chunk of their expected inheritance.

And finally, there is the complex interaction of equity release with state benefits, which requires individual specialist advice to ensure that elderly people do not unwittingly deprive themselves of valuable state benefits due to the receipt of extra income.

Improvements

In their defence, equity release providers says that longer lifespans, they have to charge a hefty mortgage rate to cover the risk of mortgagees living longer than expected.

There have also been significant improvements in the equity release marke since the scandals of the early 1990s, when pensioners’ homes were re-possessed because their mortgage debt exceeded the value of their properties.

Today, many equity release companies comply with the Safe Home Income Plan (SHIP) group’s code of conduct which requires its members to commit to a ‘no negative equity guarantee,’   – an  undertaking to accept the value of a property on the death of the owner as full and final settlement of the outstanding debt, even if the latter exceeds the value of the property..

The government has introduced new rules which lessen the impact of equity release on  pensioners doing equity release while claiming certain state benefits.

The  over 75 years no longer have to report changes in their assets and income to their local benefits office, so that entitlement to state benefits is not withdrawn when income increases.

The capital threshold (the amount of savings that pensioners can hold without it affecting pension credit) was  raised to £10,000, and for housing benefit and council tax benefit to an upper limit of £16,000  (unless they qualify for the guaranteed element of pension credit, in which case entitlement continues).

Many equity release plans also enable pensioners to withdraw a series of small lump sums over their retirement, (rather than taking one big lump sum at the outset) so that interest only accrues on a lower amount.

So while equity release is far from perfect,  I believe it will eventually become a mainstream way for pensioners to top up inadequate pensions.

The future

I have seen for myself how the receipt of a small lump sum can have a life changing effect on a cash-strapped pensioner who desperately needs extra cash to repair their home, replace their car or visit a long lost relative in a far flung part of the globe.

The sad fact is that with disappointing money purchase pensions, increasing longevity and a reluctance to move home when elderly, equity release is often regarded as a desperate last resort to raise much needed cash.

But it need not be that way. With higher sales standards, better safeguards and increasing improvements to the product, equity release could become a mainstream financial planning tool for the millions pensioners  who will otherwise face a poverty-stricken retirement.

Pam Atherton is a freelance journalist