Equity release back in fashionPosted on: 25 March 2008 by Gareth Hargreaves
research suggests that there exists a £70,000 gap between what people think they need to save for retirement and what they actually need.
A new financial product could be the answer for anyone looking to release equity in their home.
Work longer, save more, spend less, die young. These are some of the bleak options we are faced with when it comes to planning for retirement today. Government figures show that the average 65-year-old male today will live to 81, while the average female to nearly 85.
The fact we are all living longer means that many of us planning for retirement will inevitably be faced with a shortfall in the amount of money we have and the amount we’ll need.
So bad is the ‘income gap’ that research suggests that there exists a £70,000 gap between what people think they need to save for retirement and what they actually need. Even worse, further research suggests that the average person is a massive £180,000 short of what they need in order to live their retirement at what they see as a comfortable level.
Not surprising then that over one and a half million pensioners have returned to work in a bid to make ends meet. So common is the working pensioner these days that the supermarket chain Sainsbury’s is soon to launch a recruitment drive specifically targeting the over-50s. No doubt a large proportion of those they recruit will be of pensionable age.
While pushing trolleys about a supermarket car park might be some people’s idea of a good way to spend retirement, for those who don’t want to pursue that route, there are other ways to generate an income during retirement that don’t involve working or living like a pauper.
One of the most popular ways in recent years to generate an additional income in retirement, cashing in on booming property prices, has been equity release. Although regarded as a dirty word to many, independent research conducted on behalf of Prudential has found that retired homeowners using an home equity plan can increase their income by up to 38 per cent a year.
Despite the immediate financial benefits of equity release many people are still confused by the idea, and what it actually means.
David Garfitt, head of residential conveyancing at York and Lincoln based law firm Langley’s explains.
"Equity release refers to the process of releasing or 'unlocking' part or all of the excess value on a property - excluding what is still owed on any mortgage."
Mr. Garfitt points out that there are two types of equity release; lifetime mortgages and home reversions.
“The first allows a loan to be secured against your home. This loan is then repaid when you die and your house is sold. Home owners can take out a 'lifetime mortgage' and still 'own' their home. The second, home reversion, refers to when all or part of the property is sold to a third party which means that a percentage of your home will be owned by someone else."
What puts many people off the various formats on offer is the high levels of interest many schemes charge. In May 2005, the Financial Services Authority (FSA) raised concerns over the way equity release schemes were being sold, in particular the issue that customers were being encouraged to take the maximum amount of money they could at the beginning of the scheme, whether they needed the full amount or not, and investing the surplus cash in other investment products, which were more often than not sold by the same company providing the scheme.
As a result, many people found they were lumbered with high levels of interest and unwanted ‘investments’ after releasing the equity in their homes.
In an innovative in the market however, Prudential have come up with a new lifetime mortgage scheme that promises to do away with the practice of customers being forced to ‘borrow to invest.’
Pru’s new product, the Prudential Property Value Release Plan, allows customers to take their money as they need it at anytime during retirement rather than in one single lum sum.
As with normal lifetime mortgages, repayment tends to happen when the last borrower dies or goes into long term care, although other events, such as the sale of the property, can also end the mortgage. The interest rate is fixed for the period of the loan. Also, because Prudential is a member of SHIP, the organisation which sets a code of practice for all equity release schemes, the customer benefits from a no negative equity guarantee, so a customer’s estate will never owe more than the house is worth.
By including a flexible facility, which allows customers to take a smaller initial sum followed by tranches of £5,000 or more at any time, customers could significantly reduce their interest charges.
For example, if a couple considering an equity release scheme, both aged 67, have their property valued at £250,000, they could either release the maximum £67,500 available up front as with ‘traditional’ schemes, or choose to release it over time under Prudential’s new scheme.
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