Unlock your cash to ensure retirement dreams come true

Conal Gregory looks at ways to gain useful money from your home

If you need financial help to have that long awaited cruise, build an extension or simply pay off debt, consider releasing some of the capital in your bricks and mortar.

The over 60s own £1 trillion worth of housing, some of which could be used to improve their quality of life.

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Money unlocked now can help to ensure retirement dreams are fulfilled or even that standards of living are maintained.

As property increases in value over the years, it is comparatively easy to become asset-rich but this can be of little comfort to those on a limited income. Yet homeowners from 55 years upwards can use their home to generate a tax-free cash lump sum or regular income or both.

The equity (value) in your home could be released in two main ways:

n lifetime mortgage through a loan secured on the property;

n home reversion which means selling all or part to a third party.

There are no restrictions on how the money can be spent. Almost one-third (31 per cent) of those taking out equity release in the first three months used the funds to reduce or clear their debt, which averaged £25,418 according to Key Retirement Solutions.

You can stay in your home for the rest of your life or until you move into long-term care. Most providers allow any plan to be portable. The inflexible ones include Holmesdale Building Society.

On the negative side, remember that the value of your estate will be reduced and your entitlement to benefits may be affected.

With such an important decision, it’s vital to have specialist advice.

Seek an independent financial adviser with experience in this field and ensure that the provider is regulated by the Financial Services Authority, whose Money Advice Service can be contacted on 0300 500500.

Check that any potential provider is a member of Safe Home Income Plans, known as SHIP, which is a trade body established in 1991. Its members must offer specific guarantees, notably that ‘no negative equity’ will apply. This means that you will never owe more than the value of your home.

Non-SHIP providers include Halifax, Royal Bank of Scotland, Standard Life and such building societies as Holmesdale, National Counties, Newbury, Scottish and Vernon.

Involve your family in the decision-making. Not only will their inheritance be involved, but there may be better alternatives to equity release, such as downsizing to a smaller property or moving in with your family.

Last year over 22,000 equity release plans were taken out, up from 21,305 in 2009. The average amount released was £43,519, a fall on £48,212 the previous year.

With a lifetime mortgage, a loan is secured against the value of the property. Interest is added until the loan is repaid, which is usually on the death of the last surviving partner or their move into care.

The proportion that can be valued is severely limited, ranging from 10-50 per cent. This depends on the applicants’ ages. However, many plans allow additional sums to be taken out later.

Unlike conventional mortgages, usually no monthly repayments are made. Typical fixed rates are 7.62 per cent (Aviva), 6.99 per cent (Hodge, More 2 Life), 6.59 per cent (Just Retirement and LV=, formerly Liverpool Victoria), 6.39 per cent (New Life Mortgages), 6.13 per cent (Stonehaven). Variable rates are typically lower: 4.89 per cent (Holmesdale), 4.99 per cent (Vernon) and 5.04 per cent (Scottish), according to research by Moneyfacts Investment Life Pensions.

Such rates mean that it will take only 11 years for a loan to double in size. If someone is taking out equity release because there has been an unexpected shortfall with an endowment policy, their long-term plans could go drastically wrong.

There is no minimum property value with Scottish but £60,000 with Hodge and New Life Mortgages and most £70,000. Aviva requires £75,000, Vernon £80,000, Holmesdale at least £104,000 and Newbury £125,000.

If income rather than a lump sum is preferred, Bridgewater, Just Retirement and Vernon can provide.

Home reversion is the second type of equity release. This means selling part or all of your home to the provider in exchange for a tax-free cash sum and a guaranteed lifetime lease to remain in the property.

If the partial option is taken, you share future growth in the property’s value with the equity release provider. When the plan ends, the provider takes its percentage share from the sale proceeds.

Don’t expect to receive the market value as the home reversion provider has to concede your right to remain in the property, rent-free, for as long as you like. Maintenance incidentally will still be your responsibility.

Another idea is to opt for a ‘drawdown’ scheme, which means the money is taken in instalments and gives the occupant more flexibility. This saves interest on a lifetime mortgage whilst with home reversion a lower percentage of the property has been traded in. In both cases, drawdown lessens the impact on your estate.

Last year, drawdown plans accounted for 74 per cent of equity release schemes, up from 64 per cent in 2009.

Even with a mortgage on a property, equity release can still be obtained provided some of the cash released pays the loan off.

The new provider wants a first charge on the title.

Remember that if the money released is invested, the return could well be less than the interest being charged. Therefore, only borrow sufficient sums for specific purposes, not for general savings.

Watch the charges. Typically these can include an arrangement fee (such as £689 with Aviva on its ‘lifestyle’ plan), survey fee (linked to value but can be £300 plus), legal expenses (£300-£700) and early repayment charge (which can be as high as 25 per cent of original loan as with Aviva and Stonehaven).