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Equity Release

QUESTION: Is equity release the answer to help raise funds for senior citizens who own a largish property but are short of cash. What is a home income plan and should this be considered and what are the facts?

There are two types of home income plan. A lifetime mortgage pays a cash sum or a regular income. The interest rolls up until your death or until you move into residential care. With a home reversion, meanwhile, you sell part, or all, of your home to a company in exchange for a cash sum and a free lifetime tenancy. The home reverts to the company on your death, or if you move into residential care.

Consider all the options before signing anything. For example, you could opt to sell your home, take some cash out and move to a smaller property. This may not appeal if you are emotionally attached to your home, but it could be more cost -effective than a home income plan.

Look at interest-only mortgage deals. Lenders should be happy to do business with you, so long as you can prove that you have enough income to meet the repayments. The interest payments are made monthly and the total debt will be repaid after your death.

Discuss the options with your family because the value of your estate will be reduced by a home income plan. You may find that your children are happy to make a contribution to your living costs.

If you are taking a life-time mortgage, you can expect to pay application, valuation and legal fees of £300 to £500 each. There may also be a broker’s fee of 1 per cent of the amount raised. The typical interest rate on a lifetime mortgage deal is 6.5 per cent. Northern Rock charges 6.19 per cent.

Costs for home reversion schemes vary. David McGrath, head of equity release at London & Country Mortgages says ‘Ask for quotes from different companies. Some charge for valuations, while others offer this service free of charge. Ask how much you will receive after deductions’.

Taking an income from a lifetime mortgage is almost always the best option. A recent mystery shopping exercise by the Financial Services Authority (FSA) found that many elderly people are being advised to borrow more than they need to invest in risky stock market schemes. Such advice is poor. The rate of interest on the loan will almost certainly exceed the rate of return on the investment

Only lifetime mortgages are covered by the FSA, but reversion mortgages are expected to be regulated next year. The FSA’s website (www.fsa.gov.uk) has a special section on equity release. More information is available from Age Concern (www.ageconcern.org.uk, 0800 1695276).

Deal only with organisations affiliated to Safe Home Income Plans (0870 2416060), members of which must comply with its code of practice.

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