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Saturday Money: Should you unlock the cash in your home?: Equity release More people than ever before are keen to make the most of their property's value. Rupert Jones looks at the pros and cons

August 2, 2014

Rupert Jones

Schemes that allow older people to unlock some of the value tied up in their property are enjoying a surge in popularity - fuelled by problems with "interest-only" mortgages and parents keen to help their children on to the housing ladder.

New industry figures show that "equity release" lending has hit a record high. The total value of plans agreed in the first six months of this year was pounds 641m, which is more than a third up on the same period last year, according to the main trade body.

Equity release is a way of freeing up money from your home that usually involves older people taking out a special type of mortgage or selling part, or all, of the property. It has been around for some time, but has evolved over the years. However, these schemes can prove a very expensive way of borrowing, particularly if you live a long time. That's because the way they work means you end up paying interest on interest. Over 20 years the total owed can quite easily triple (see panel).

What exactly is equity release? It's a way for older people - the minimum age is usually 55 or 60 - to get cash out of their property without the need to move home. In most, if not all, cases there are no monthly repayments to make.

The most common schemes are mortgage-based products secured against your home and repaid when you die or go into long-term care. These are known as "lifetime mortgages".

How does it work? They allow you to take out a loan on your property in return for a cash lump sum, or regular smaller sums. This money can usually be spent on whatever you want. You continue to own your own home, and you retain responsibility for maintaining it and paying the bills. The big "but" is that they charge interest on the total amount of the loan, including the interest that has already accumulated.

However, following the scrapping of rules that effectively forced many retiring workers to buy an annuity, equity release could increasingly form part of people's long-term planning. For example, you might draw down your pension pot in the earlier years of your retirement, then release money from your home once you are in your 80s.

The other type of equity release is the home reversion plan. With these, you sell all, or part, of your home to a company in return for a lump sum, or regular income, and the right to remain living there. But home reversion plans have shrunk to less than 1% of the overall market, says the Equity Release Council, the trade body which includes plan providers, financial advisers and solicitors.

When it comes to long-term care planning, equity release can be useful if you're looking to fund care in your own home, says the official Money Advice Service. But it adds: "If you think you'll soon need to move out into residential care, then equity release probably won't be suitable. That's because many equity release arrangements have a clause that requires you to sell the property and repay the loan in full if you move permanently into a care home."

Before you think about equity release, consider all the alternatives.

Like what? The reality is that for most older people, the most financially effective way of releasing equity will be to move to a smaller property or a cheaper part of the country.

If that doesn't appeal, there may be other options. Have you claimed all the relevant state benefits, considered using other savings or assets, or thought about renting out a room?

If you need money to make alterations to your home, speak to your council to see if they can provide assistance.

Who offers these deals? Companies offering lifetime mortgages include Aviva, Just Retirement, LV= (Liverpool Victoria) and More 2 Life.

The most popular sort is the "drawdown" version, designed for those who don't need a large cash lump sum at the outset. Instead, a pot of money is set aside for you to draw from, as and when you need it - so you can use it to supplement your income.

You only pay interest on the cash you release, which could save you money and allow more to be left as part of your estate.

According to the Equity Release Council's figures, drawdown mortgages now account for 59% of new sales by value. However, lump sum mortgages are gradually becoming more popular.

How old do you need to be? The "core" age group for those signing up to equity release tends to be 65 to 75, with the average age 68/69, says Dean Mirfin at independent specialist Key Retirement Solutions. Because the interest on a lifetime mortgage "rolls up", there's a strong argument for saying that it's a case of the older, the better.

What impact will it have on my family? All Equity Release Council members offer a "no negative equity guarantee," which means that, no matter what happens to the housing market, customers will never owe more than the value of their home. But that could still mean your family is left with little or nothing from your property when you die. Before you make a decision, do your research, talk to your family and take advice.

I want to leave something for my children to inherit. Can I still do this? Many lifetime mortgage providers allow people to protect a percentage of the value of their property as an inheritance. But opting for an inheritance guarantee will reduce the amount you can borrow and may affect the interest charged.

How much can I borrow? This usually depends on your age, the value of your property and sometimes your health. At age 67 you can typically borrow around one quarter of the value of your home, rising to around one-third once you are in your mid-70s, according to the calculator on Just Retirement's website. If you have certain medical conditions, you may be able to borrow a higher proportion of your property's value or obtain a better interest rate via an "enhanced" plan.

What happens to my partner if I die? If your plan is held in joint names, your partner will be able to continue to live in the property under the same terms.

I assume there are fees to pay? Yes, that's right. As a rough rule of thumb, you're probably looking at around pounds 2,000 to cover advice, the property valuation, legal fees etc, says Mirfin.

Are they safe? Equity release is regulated by the Financial Conduct Authority.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Guardian (UK)

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