Equity release for cash-strapped pensioners

Many pensioners are forced to live off limited pensions and savings despite owning mortgage-free homes worth well in excess of £100,000.

They are victims of the classic asset rich/cash poor financial trap as they cannot raise a conventional loan or mortgage because they are too old or have no income, but have valuable bricks-and-mortar security to offer a lender.

Traditionally, mortgage lenders will let people aged up to 75-years-old borrow, providing they have an income to repay the loan.

As medicine and science increases longevity and people are living well in to their nineties, more and more pensioners are forced to live on dwindling savings and a small pension.

One way of solving the problem is an equity release plan – also called a lifetime mortgage, a reversionary mortgage or home income plan.

These financial schemes allow the elderly to cash in some of the value of their home with the debt settled from the sale of their after death.

However a provider dresses up their equity release plan, the engine under the bonnet is pretty much the same – you borrow part of your home’s value and in return you give the lender a share of the sale proceeds when you die.

To qualify, you will generally be at least 60 years old, have no mortgage and own a well-maintained property.
If you are considering borrowing from an equity release plan, Age Concern and the Financial Services Authority recommend taking independent financial advice before proceeding.

Some points you should think about before making a decision are:

• You make no loan repayments – the lender makes their cash back when your home is sold
• The percentage of the property you own is set at the start of the plan
• If the property goes up or down in value, so does your share pro rata
• More cash may be available unless you took the maximum offer from the start
• If you smoke or are ill, you may get more cash than someone who doesn’t smoke and is fitter because the lender may consider they will receive a return on their investment quicker because you may die earlier.
• The property valuation your loan offer is based on will be less than the current market value of your home

To make sure you are dealing with a reputable equity release plan company, check their products carry the SHIP logo (Safe Home Income Plans).

SHIP is a financial industry group promoting safe equity release schemes. You can contact SHIP on 0870 241 60 60 or visit their web site at http://www.ship-ltd.org/

Members provide a number of customer guarantees in their plans, including:

• You have the right to live in your property for life
• You may move home without penalty
• You will never owe more than the value of your home

Summary

• Anyone over 60 struggling on a small pension or limited savings can consider taking out a mortgage or an equity release plan

• Mortgages are difficult to obtain for the over 60s who may not have sufficient income to support the borrowing

• Equity release plans are designed to release cash from the value of a home for the over 60s

• If you are considering a equity release plan, make sure the scheme is SHIP approved