Conal Gregory: Get a ‘living inheritance’ from unlocking wealth in your home

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Many approaching retirement or who are already pensioners are sitting on small ‘gold mines’. Their homes have increased markedly in value and yet – unless they sell or remortgage – they cannot derive any of the benefit.

Equity release provides just such an opportunity to enjoy some of the enhanced property value that has built up over the years without having to move home. Providers of such schemes do not wish to know if the funds are to clear debt – running from bank loans and credit card spending to overdrafts – or to redecorate or even enjoy that world cruise.

“Unlocking housing wealth offers a means to provide a ‘living inheritance’,” says Nigel Waterson, chairman of the Equity Release Council. The money may be for something far less prosaic than personal debt or travel, such as funding domiciliary care needs so that someone can remain in the home they love as they grow older.

As retirement starts, the average debt exceeds £24,000 which will eat into pension income and take years to clear. With over 55-year-olds sitting on property valued at an estimated £1.4 trillion, equity release appears an attractive proposition. According to Halifax, the average house now costs £213,472.

In the current climate of derisory interest rates, the expected return from savings is unlikely to materialise and yet property prices continue to rise. For many, their home is their major source of wealth.

Yet such a scheme comes at a price. As there are major inheritance factors, the options should be discussed with family members and trusted professionals, such as your solicitor.

Ask an experienced independent financial adviser to guide through the alternative plans and providers.

An IFA is likely to charge rates of one per cent (LV=), one to two per cent (Hodge Lifetime), two per cent (Just Retirement, Legal & General, Pure Retirement), two to 2.25 per cent (More2Life), 2.1 per cent (OneFamily), 2.25 per cent (Aviva), 2.3 per cent (Retirement Advantage) and three per cent (Bridgewater).

Two building societies, who are not members of the Equity Release Council, quote the lowest commission: 0.35 per cent (Vernon) and 0.4 per cent (Scottish).

Of the two major schemes – a lump sum lifetime mortgage and a drawdown plan – the average lent last year was £77,494 and £46,958 respectively with an additional £32,348 agreed which could be called upon at a later date. The sums are tax-free and significantly above the average defined pension pot of £25,000.

Equity release is regulated by the Financial Conduct Authority. With a lifetime mortgage, a single lump sum can be extracted and/or smaller sums over time up to an agreed maximum limit. You retain full ownership of the home. Any interest can be paid or rolled up.

The loan and any outstanding interest are repaid by your estate when you either die or move permanently into long-term care. For a couple, the repayment is not effected until the last person living in the property dies or moves.

It is also possible to elect to retain some of the value in the property as an inheritance for your family. This means you can benefit from releasing equity while ensuring there is something to pass on to your children.

Some of the lifetime mortgages allow monthly interest payments to be made in full, ensuring the debt does not rise, or by partial sums. There is still the option to move to a roll-up arrangement at a later date.

The other major method, accounting for 60 per cent of equity release by value, is a drawdown plan. This allows money to be withdrawn in stages when required rather than taken as a large lump sum. The benefit is that interest is only liable on the cash taken and your beneficiaries could enjoy a greater inheritance.

Watch though for the minimum initial sum that can be withdrawn on drawdown and seek a guarantee that the reserve facility can be called upon at any stage. It may be that second and subsequent withdrawals are not charged at the same interest rate.

The amount that can be released depends on both your age and value of the property. Some providers will offer larger sums to those with past or current medical conditions.

A third scheme, home reversion, allows the provider to buy all or a part percentage of your home. Unless further cash releases are taken, the share you retain will remain the same regardless of property values.

When the property is eventually sold, the proceeds are split according to the proportions of ownership.

This means that the provider will benefit by any uplift in property value and does not need to raise interest on the sum borrowed.

Remember that professional fees – such as for a solicitor and estate agent – are incurred, albeit jointly with the provider, when a home reversion plan is ended.

When comparing products, look particularly at:

Interest rate and if fixed or variable

Minimum property value

Minimum/maximum advance

Fees: arrangement, early repayment, IFA commission.

All quote fixed rates apart from two products from OneFamily, which are at 3.20 and 3.69 per cent pa variable on lump sums.

Other typical annual rates on a percentage basis are 5.30-5.79 (OneFamily), 4.48-5.79 (Hodge Lifetime), 4.80-6.29 (Legal & General), 5.10-6.04 (LV=), 5.36-6.80 (More2Life), 5.99-6.59 (Just Retirement), 6.04-7.19 (Aviva), 6.52-6.99 (Retirement Advantage) and 6.54-7.24 (Pure Retirement).

An adviser will guide on restrictions and additional benefits, such as Aviva’s one per cent additional loan to value allowance for single life applications for its 7.19 per cent rate on lump sum advances.

Guidance can also be given on using equity release on a second home, which is acceptable to LV=.

According to research by Moneyfacts Investment Life & Pensions, all providers except Vernon make an early repayment charge. This is often linked to the movement in 15-year gilts but some quote specifically, such as 5.5 per cent in the first five years and three per cent in years six to 10 with LV=.

Most providers accept applicants from 55 years but Legal & General, LV=, Pure Retirement and Retirement Advantage commence plans at 60 years and Bridgewater Equity and Scottish from 65 years. Hodge Lifetime and More2Life vary depending on the product. Vernon has no minimum.

Arrangement or application fees are usual.

Whilst Bridgewater and Vernon have none and Aviva is nominal at £5, some providers make significant charges, such as £4,999 with Legal & General’s 4.80 per cent plan, £995 with Hodge Lifetime’s 4.48 per cent scheme and £895 usually with Pure Retirement.

In a nutshell, equity release can help to address three problems: low retirement incomes with poor annuity rates, the ticking timebomb of interest-only mortgages and the lack of care provision.