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Home value may make up for sliding investments
Your bricks and mortar can be a valuable lifeline against eroding savings as well as a boon to a better lifestyle.
Many people were lulled into a false scenario that Britain was making good economic advances in the 10 years 1997-2007 of Gordon Brown's Chancellorship.
In fact, the "growth" in that decade was largely built on a bubble of rising debt and property prices. Now interest rates are so low and dividends in many companies unreliable, taking money out of your property to boost your income may make sense.
Although property prices are falling – down 13.6 per cent annually according to the Department for Communities and Local Government – those who purchased several years ago have still enjoyed a substantial rise.
Those who need capital – perhaps to maintain a property – and prefer to stay in their home, rather than downsize, can boost their disposable assets by taking the "equity release" route.
However, it's a major decision which should be discussed with your family with professional help from an experienced independent financial adviser.
While traditional mortgage lending fell by almost one-third last year, loans for equity release dropped only nine per cent to 1,095m, according to industry body SHIP (Safe Home Income Plans). By taking value out of a property, the occupant is foregoing part of its growth in the future.
If using a provider in SHIP membership, there is the added safeguard of a no negative equity guarantee in its code of practice.
Non-members include such building societies as Holmesdale, Newbury, Scottish and Vernon and three banks: NatWest, Royal Bank of Scotland and Scottish Widows.
Many considering equity release now realise offers are based on falling valuations.
Halifax says prices have dropped 22.5 per cent since their August 2007 high. This means the average property has declined from 199,612 to 154,716 – the lowest level since April 2004.
Any improvement will depend on both a brighter economic outlook and credit conditions easing.
Equity release started in 1965 and in the 1980s gained a poor reputation with investment bond schemes and roll-up plans with variable interest rates, which subsequently proved to be bad value for money. Today far more regulation is in place for the alternative schemes.
Lifetime mortgages account for over 94 per cent of equity release plans. The interest rate should be fixed for the life of the loan, avoiding the risk that a far higher rate will be imposed at a later stage. The loan to value ratio rises with age. That means it could be over 50 per cent for a 95-year-old but about 20 per cent for a 55-year-old.
The money can be taken as a single lump sum, on a regular basis or accessed as required. The advantage of the third route is that no interest is charged until the loan is advanced.
Advisers often recommend an "income drawdown" arrangement which means that gradually more of the agreed loan is released at, say, five yearly intervals. That helps financial planning with an annuity or other scheme.
The capital and interest are not repaid until the property is sold, which might be on death or when the occupant moves out, such as into residential care. As the final interest charge could make a sizeable difference to the money the family might expect to inherit, it is vital relatives are consulted.
Home reversion schemes allow a proportion of the property to be sold to the provider for a fixed sum. That gives a degree of certainty. It is available to those 65 years and older. When the property is eventually sold, your share forms part of your estate.
Watch carefully for three potential problems with equity release:
n If circumstances change and some of the loan needs to be repaid prematurely, too little equity may remain.
n High redemption charges.
n Money released can alter the amount of benefits.
Yet there are now products that offer the security of fixed rates with little or no redemption penalties. For instance, Godiva offers a drawdown facility which allows money to be accessed when required with no early redemption fees (0845 766 5522).
An enterprising development is the ability to release equity from a second home.
New Life Mortgages offer just such a scheme (0121 712 3800). Another idea is to agree on the amount of interest to be charged each month and therefore the fee accrued to the final lump sum. Stonehaven offer this with their Interest Select plan (0800 068 0212). The interest rate depends on age.
Fixed rates, according to Moneyfacts, are 6.08 per cent (55-69 years), 6.48 per cent (70-74 years) and 6.68 per cent (75 years and older). One of the flexible options is to agree upon the drawdown figure and then to take it either in annual fixed installments or on a completely flexible basis at the client's discretion over, say, a 10-year period.
Also, consider providers – like Prudential – which raise the maximum loan available by one per cent on each annual anniversary of the contract.
The risk of equity release being detrimental to means-tested benefits is contested by leading advisers. Dean Mirfin of Key Retirement Solutions says it works out clients' eligibility and advises them of the potential benefits. "With the pensions credit – one of the main benefits – the assessed income period is typically five years. If the client's circumstances change during this period, they don't have to tell the DWP – that is part of the rules."
Last year the average amount released through equity release was 48,287 – a 16 per cent increase on 2007. The upward trend in the first quarter this year was to lump sum rather than regular withdrawals.
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Thursday 24 May 2012
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