The key to unlocking cash from your home

DWINDLING pension pots mean the number of retirees tapping their properties for income is expected to rise by nearly 50 per cent over the next decade. Research compiled for The Mail on Sunday reveals that one fifth of over-50s – around 3.9 million people – are planning to solve a cash crisis in retirement by downsizing, making use of buy-to-let property or borrowing against the value of the family home.

Borrowing, commonly known as ‘equity release’, is rising in popularity. Unlike a conventional home loan, equity release does not require a borrower to pay any monthly interest charges. Instead, the interest charges roll up into the loan with the final debt usually cleared when the homeowner dies or goes into long-term care.

Some £10 million a day this way has been released from wealth tied up in property in the first three months of this year – more than double the amount taken in the same period just two years ago.

Over- 50s planning to release wealth from property are forecast to borrow £37 billion via lifetime mortgages, according to research by provider OneFamily.

Nici Audhlam-Gardiner, managing director at OneFamily, says: ‘ Homeowners are seeing their property as a good way to fund their retirement. This comes as income from pensions, both state and private, decreases.’

Sarah Coles is personal finance analyst at investment adviser Hargreaves Lansdown. She agrees that pension provision is weakening. This is particularly true of final salary pensions which pay a guaranteed income for life.

She says: ‘People are enjoying the peak of final salary pensions. From here on in, we will start seeing the impact of their decline.

‘When people in their 50s retire, only a third will be getting income from a final salary pension. As a result, more will have to tap into the value of their home to address a need for income.’

Despite seeming a straightforward solution for income-hungry retirees, homeowners are advised to pay due attention to the pitfalls of using property as a pension.

OPTIONS

INVESTING in a buy-to-let property to generate retirement income can be profitable. But there are significant upkeep costs, periods when the property might be empty and capital gains tax to be paid when the property is sold. It is also an unrealistic goal for many retirees who do not have the means to buy a second property. Downsizing is an alternative way to raise cash, but it is not without drawbacks.

Coles says: ‘Over time, a property becomes more than just a pile of bricks. We get emotionally invested in them. As a result, you can struggle to part with the family home, you might want a base for grandchildren to come and stay, and you may not want to leave your family and friends behind.’

The difference between the value of a person’s home and the price of a smaller property may also not be big enough to generate a significant lump sum, particularly once moving costs are deducted. Downsizers also avoid paying a high price tomorrow for a lump sum today – which is the case with equity release.

If homeowners have not discussed equity release with family – as they should as a matter of course – the slice of a family home sacrificed to r e pay a debt t hat wil l have ballooned over time can come as a big shock. But for many it is the only solution to address a severe drought in funds during old age.

Equity release products sold in the 1980s and 1990s were poor value for money. But standards have improved.

OneFamily’s Audhlam-Gardiner says: ‘One of the biggest concerns from homeowners is that they will lose their home. They also worry they will either not be able to leave an inheritance or there are strict rules about how any money released can be used. All of these concerns are ill-founded.’

The real danger of lifetime mortgages is compound interest – the ballooning of the debt as interest charges are capitalised, triggering higher charges on an ever increasing loan.

WAYS TO RELEASE CASH FROM PROPERTY Home reversion plan

YOU sell part or all of your home to a provider for a tax-free cash lump sum. The provider guarantees you the right to live in your home, rent free, for the rest of your life. When your property is sold, proceeds are divided according to who owns what percentage.

Lifetime mortgage

YOU take a loan against the value of your home for which interest is charged. You retain ownership of the property – and the l oan, together with interest, is repaid after you die or move into longterm care. The interest rolls up each year although you can choose t o make i nterest payments – monthly or ad-hoc – to limit the impact of compound interest.

Retirement interest-only mortgage

A SIMPLER form of lifetime mortgage where interest is repaid each month. The loan therefore does not swell and wealth in the property is preserved for family members to inherit. The loan is repaid once a homeowner dies or goes into care.

WHY A PENSION STILL MAKES SENSE

IF using your home to fund retirement does not appeal, the alternative is to focus on saving – and fast. Coles adds: ‘It may feel like it is too late to do anything about a pension shortfall, but there is still time to make a big difference.

‘Save as much as you can afford into your pension as quickly as you can.’

She adds: ‘If children have flown the nest, this is your opportunity to focus on your pension planning.’

If a 50- year- old were to start saving now, contributing £400 a month and having it matched by an employer, they could have a £174,000 pot by retirement at the age of 67.