Jenny Lowe assesses the current options for older investors who want to release equity from their homes.

People living from the income generated by their savings are finding that level of income to be under increasing pressure. Following successive interest rate cuts, the value of retirement investments has been eroded, quite dramatically in some cases.

For many, the solution could be to use the equity in their homes to supplement the missing income. For even with the recent falls in property values, many older investors will still have a considerable amount of value tied up in their houses.

Inflationary pressures
David Cooper, marketing and distribution director at Just Retirement, points out that ‘Simultaneous with loss of income, the newspapers report that food price inflation has risen to nine per cent for the 12 months to the end of February, despite significant falls in the general level of inflation.

‘Taken together, these two factors could significantly damage the standard of living of pensioners, who will now be seeking alternative methods to generate income from their assets. In many instances, they may be forced to spend capital, thus harming their ability to return to a normal level of income, even when interest rates eventually rise again.’

It is estimated that people over the age of 65 currently have £500 billion in unmortgaged equity tied up in their homes. Cooper feels that ‘Equity release may be able to restore income levels, either for those whose assets are already depleted or, when the time is right, for those who could be left with insufficient funds over a period of time.’

Greater longevity
Another, probably more welcome, problem facing those approaching retirement is the
fact that people are now living for longer. According to the Office for National Statistics (ONS), a man who turned 60 in 2006 is now expected to live for a further 21.1 years, while a woman of the same age is expected to live for a further 24.1 years.

Sharon Bratley, chartered financial planner at Fairinvestment.co.uk, points out, ‘The fact that life expectancy is increasing and the prospect of a longer retirement should be a cause for celebration, but many people will still worry about how they are going to afford to live during their retirement. Reduced income in retirement could mean that taking advantage of the equity built up in their property could become a real consideration for many.’

Over recent years, equity release has had a lot of bad press, often regarded as expensive and inflexible, but director general of trade body SHIP (Safe Home Income Plans) Andrea Rozario suggests that this view is out of date.

‘Equity release products offer increasing flexibility – there are now products that offer the security of fixed rates with little or no redemption penalties, and recently we have seen rates falling, in stark comparison with the mainstream mortgage market,’ she says.

‘This, coupled with safeguards offered by SHIP members and compared with normal mortgages, not only means that the products are safe, but also incredibly flexible, offering people options that they might not otherwise have considered, which could vastly improve the quality of their lives.’

A range of strategies
Rozario insists that ‘Equity Release is most definitely not an option of last resort but a logical option for those considering how to fund their retirement. It offers a guarantee that older people can stay in the homes they know and love, with no monthly rent and a no-negative-equity guarantee.’

However, equity release is not a ‘one size fits all’ product, and once the initial decision has been made to release some, or all, of the cash held in a property, there are a few options that you can choose from depending on your age, risk profile and plans for your future and that of your family.

The most popular is the lifetime mortgage, which allows a homeowner to take out a loan secured against the property. The lifetime mortgage is popular because it means you continue to own your home and you can repay the loan with the proceeds of the sale of your home after death, or if you move out into somewhere like a care home.

When it comes to choosing, there are two types of lifetime mortgages to consider, including an interest-only mortgage, where you get the loan as a lump sum and pay interest on the loan each month at a fixed or variable rate. Secondly, there is the more popular deferred interest mortgage, where, rather than making repayments, interest is rolled up during the mortgage with both capital and accrued interest being repaid when your home is sold.

Investors for whom income is a priority can opt for a home income plan that will use the mortgage capital to buy an annuity, which gives you a regular income that is normally fixed for life. Again, you can choose whether to make interest payments or have these deferred.

Room for manoeuvre
The maximum loan for both of these depends on your age, health and the property’s value, so recent house price decline will have an effect. However, according to Dean Mirfin, business development director at equity release provider Key Retirement Solutions, most homeowners can still borrow all they need.

‘Only 15 per cent of our customers borrow the maximum they can. Most borrow much less, which means that falling house prices aren’t a problem. But those that do want to borrow a high proportion of their property’s value shouldn’t delay their decision, because for every day that the property falls in value, the amount you can borrow also falls.’

Mirfin is quick to add, however, ‘Our average customer is 69 years old. They could easily live for another ten or 15 years after taking out the plan, at which point their property could be worth much more.’

The second option, and one that has become more popular recently, is the home reversion plan, which enables you to sell all or a percentage of your home in return for a cash lump sum.

With this option, your home will be valued by a surveyor working with the loan provider and you will get a tax-free lump sum of cash. When the property is sold – usually upon death – the reversion company gets its payout. So, if you sold half of your property to the reversion company, it gets half of the proceeds, including any growth.

When it comes to the costs associated with releasing equity from your home, you should expect the whole transaction to cost around £2,000. However, a sizeable portion of this can be added to the loan and paid back when the property is sold.

A flexible option
The cash you get doesn’t have to be put towards your pension income, it can be used for pretty much anything. According to the latest Market Monitor from Key Retirement Solutions, the most popular use of equity release was for home or garden improvements. Others included using the money to go on holiday or to help out family or friends that have money troubles.

‘Equity release can provide retirees with financial freedom in retirement but it is not always the right option for everyone,’ warns Mirfin. ‘We firmly believe no-one should commit to any form of equity release without seeking independent financial advice.’