Exploring home options

29/03/2006

It’s an old adage, but still true. Most of our assets are tied up in our homes. In fact, British pensioners saw the value of their homes increase by £48.6 billion in 2005, with the total value of their homes breaking the £1.1 trillion barrier for the first time.

 

 

The figures, from HomeWise Retirement Properties' latest Pensioners Property Equity Index, show that the nation's 6.3 million retired homeowners have gained around £3,360 each in property wealth over the past three months or £7,670 over the past year.

 

The largest year-on-year increases were in London, Scotland and the North, where on average house price increases saw retired homeowners gain between £9,293 and £16,005 each on the value of their properties.

However a consistent decline in house prices in East Anglia and the South West saw the value of retired homeowners' properties fall by £1,693 and £3,502 loss per retired homeowner respectively.

 

That said, the figures should not mask the reality of life for many retired homeowners in Britain today. Living in a valuable property while struggling to get by on the State pension does not make you feel wealthy.

Hence the increasing popularity of equity release schemes, together with downsizing and  other options - including selling one’s home and moving into secure, rented accommodation.

 

So what’s the best route if you do want to release money? First of all, there’s no question that one size definitely does not fit all. Your age, circumstances and house value should dictate the best scheme for you. Do not be railroaded into a scheme that gives you a short fix, but will leave you ill prepared for the long term.

 

There are in fact clear and distinct differences between Lifetime Mortgages and Home Reversions, the two main products on offer for releasing equity in the home, which should be carefully understood by homeowners.

 

The Lifetime Mortgage is particularly popular with those wishing to retain full ownership of their home - despite the reduction in their equity caused by the roll up of interest at a rate (typically in excess of 6% per annum).

 

Customers must be prepared to risk the uncertainty of not knowing exactly how much of the property will pass to their estate when they die.

In a “boom market” the house value (and their equity) will rise. But when property price growth cools down, this gamble looks increasingly  less attractive.

 

Home Reversion, on the other hand, looks more appealing  for those homeowners requiring certainty (eg regarding the amount they still own and security of tenure for life) or who may be averse to debt.

 

A Home Reversion allows the customer to sell part (or all) of their home in exchange for a cash lump sum and a rent-free lease for life. The amount of cash provided is driven by life expectancy.

 

If they want to raise more money at a later stage, they can opt to sell further tranches of their home, based on the value at the time and taking advantage of higher rates allowing for their advancing age.

 

For customers who prefer the certainty of a fixed cost arrangement, there is the home reversions guarantee that retained equity will not be eroded. This security is a particularly important factor for customers using equity release as part of inheritance planning.

 

Another option is to actually sell your home, invest the proceeds and move into rented accommodation with a secure tenancy. The sums to add up here are how much income you can reliably expect compared to your known outgoings, and whether you have a sufficient cushion left over.

Downsizing to purpose-built retirement accommodation with lower (and known!) running costs and perhaps some support on site is another attractive option when you want an easier home to manage and some capital in hand.

 

Our advice is always to examine all the options before deciding what is right for you. Taking independent advice is always advisable, and plan carefully for issues such as inheritance tax.