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Home Reversion: Funding Your Retirement

By Michael Challiner

According to the Prudential, it is a fact that almost 25% of retired persons have insufficient funds to meet their needs in retirement. 20% of home-owning pensioners’ expect that they will need to change to a smaller home in order to balance their financial figures.

Whilst in some cases this is a planned decision and the family home is part of their planned retirement fund, a substantial number of pensioners are taking this step through no real choice of their own. They are simply unable to fund their retirement budgets.

Due to rising house prices and low retirement incomes, many pensioners have become “asset rich but cash poor” and are tempted by the equity release schemes which are on offer. These schemes are also known as home reversion plans.

These offer cash in the form of a lump sum, income or some of each. This is secured by the value of their home. It seems a sensible solution, particularly if the person concerned has no wish to go through the upheaval of searching for a property within their budget and coping with all the re-location and removal problems, to say nothing of the wrench of leaving old friends and neighbours.

Norwich Union says that “A Home Reversion plan allows you to sell part or your entire home to a reversion provider in return for a lump sum. This cash lump sum is normally discounted from the full open market value to reflect the fact the customer has the right to live in the property until they die or leave the property permanently, for example, to go into long term care. When the home is sold the reversion provider takes the equivalent percentage from the proceeds and the rest is paid to the customer/s or their estate.”

Another type of equity release is a lifetime mortgage. It is possible to use your property to secure a loan to provide a lump sum or income for life. No repayments are made until your home is sold either through death or should long-term care become necessary.

The Council of Mortgage lenders estimate that borrowing by pensioners via equity release schemes now stands are around £2.3billion and that in future this figure could reach £100billion.

It is essential to look into any of these plans in depth before any decisions are made. The interest rate applied to equity release schemes is higher than a normal mortgage, often around the 7% mark. In a normal mortgage interest is paid back in the borrower’s lifetime but with equity release it is paid back on death. Interest charged can very quickly increase the final debt considerably.

Should a borrower’s plans alter and they decide to move to a smaller/cheaper home for instance it may be necessary to repay the loan. It may be that there would be insufficient cash to fund such a move. There could be big redemption charges should a borrower decide to pay of the loan.

Mortgage based products fall within the Financial Supervisory Authority Guidelines. This is not so with home reversion schemes.

The Treasury has plans for a consultation regarding the regulation of equity release schemes. This could mean that the FSA will be able to ensure that elderly people have some protection by overseeing the sector.

There are some very flexible new schemes coming on to the market and a whole market to explore. Do contact a financial adviser and find out just what’s available. They’ll do all the work for you and come up with some interesting options.

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