| Unlocking the wealth in your home |
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| Written by Jonquil Lowe, 2006 | |
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Page 1 of 2 Following the housing boom many people in the UK are asset rich and cash poor. Jonquil Lowe looks at schemes that allow you to use the money tied up in your home. Since 1992, UK house prices have more than tripled. On average, a detached house now costs over £299,000 and a terraced house £153,000. More than half the over-60s own their own home outright with no mortgage. On paper at least, they are sitting on substantial wealth. But you can’t use a home to buy the weekly shopping, book a holiday or pay for a builder – or can you?
These schemes provide you with extra income, a lump sum or sometimes a combination of both. Case study: paying for repairsJan was widowed in her 50s and still lives in the semi she and her late husband bought together. She just about manages on her state pension, a small widow’s pension and pension credit; getting council tax benefit helps too. The house needs roof repairs and Jan doesn’t know how to pay for the work.She wonders if an equity release scheme could be the answer. But she needs to check whether raising a cash sum through equity release would trigger a cut in her pension credit and council tax benefit. She should also investigate whether instead she could get help with the cost of the repairs from her local council. No free lunchUnlike downsizing, when you use equity release, you do not get full value for the amount of your home that you mortgage or sell. It’s essential to realise the impact this has on your estate, something you might want to discuss with family members.With a lifetime mortgage, typically you do not pay interest on the loan month-by-month. Instead, the interest rolls up and is repaid only when the mortgage comes to an end. The amount owed can grow at an alarming rate. Figure 1 shows how an initial loan of £50,000 could grow to an outstanding debt of over £70,000 after five years and nearly double to £98,000 after ten years. This means that, even if at the outset you borrow only a modest sum, by the time the loan and interest have been repaid there may be very little left over from the sale proceeds to pass on to your family. Click on the image to enlarge in a new window.  Figure 1. Lifetime mortgage: how the amount owed increases as interest rolls up. it expects to get back later on. According to the Financial Services Authority (FSA), depending on your age when you take out the scheme, you typically get 35–65 per cent of the value of the part of your home you sell. For example, if your home is worth £200,000 and you sell half of it (worth £100,000) to a reversion company, you’ll get a lump sum between, say, £35,000 and £65,000. If by the time you die the home has increased in value to £300,000, the reversion company would take half of this (£150,000). Case study: enjoying wealth nowReg and Martha married late in life after unsuccessful previous marriages. Reg is estranged from his only son and doesn’t want to pass on his wealth to Martha’s family. Instead, he would prefer to spend all he can while he is alive and thinks an equity release scheme could help him do that.It’s crucial that Martha checks out what Reg is planning. She needs to make sure that the scheme would enable her to carry on living in the home if Reg died first and to understand what impact the scheme may have on any inheritance she would like to leave. Not for everyoneIf you are 60 or over, you might qualify for pension credit and other means-tested benefits, such as council tax benefit. From age 65, you might qualify for a higher personal allowance (age allowance), which reduces the amount of tax you pay. Both of these are affected by the amount of income you have and pension credit also depends on your capital. So taking out an equity release scheme can cause a cut in your benefits or increase in your tax bill. Especially for people on low incomes there may be better alternatives to equity release. |
