Most people living on a pension will find that it does not stretch as far as they would like, whether for mundane expenditure, such as repairs to the roof, a much-needed holiday or simply to live a little. Many of those trying to make a fixed income reach a little further may find themselves living in a house whose value has rocketed, while the cash in the bank never seems to go far enough,

The obvious thing to do is to "downsize" – to move to a smaller house and use the surplus from the sale of the original home for spending. However, after the costs of moving have been taken into account, including stamp duty and estate agent’s and legal fees, often there is not much left in the kitty after the move. Also, older people very often don’t want to leave their family home: they have fond memories of it, they have friends and relatives near by, they have invested time and effort in making their home how they like it and, while it may be a little large for their day-to-day needs, it is a comfortable size when the grandchildren come to stay.

Equity release schemes 

The answer could be equity release. This means handing over part of your home to a lender in exchange for cash or an income stream. There are two main ways of doing this. They are a “lifetime mortgage”, which is the most popular form of equity release, whereby you take out a loan against the value of your home, and a “home reversion” scheme, where you sell all or part of your home to a lender in return for either extra income or a lump sum.

With a lifetime mortgage, the interest charged on the loan rolls up until the house is sold when you die or move into care. Under the SHIP (Safe Home Income Plan) rules this sum is guaranteed never to exceed the value of your home.

The advantage of a lifetime mortgage is that you continue to own your own home, and if house prices continue to rise there is a chance that there will be a substantial proportion of the value left for your heirs. If prices fall, the guarantee means you can never owe more than the value of the house.

With a home reversion scheme you transfer legal ownership of your home to the reversion company, with the portion that you have not directly sold to the reversion company held in trust for your benefit.

You can remain in your home for the rest of your life rent-free. When the house is eventually sold, the reversion company keeps the proportion of the house that you have released and you or your heirs receive the remainder. So, if you released 20% of the value of your home, the lender will receive 20% of the value of the property at the time of the sale and you or your heirs will receive the rest. The advantage here is that you know what percentage you have handed over, which stays the same unless you opt to increase it.

Equity release used to be considered a very expensive option for those seeking extra income in retirement. However, plans have become more sophisticated and flexible as more companies have entered the market, and mortgage rates are keener nowadays than they used to be, sometimes even lower than basic mortgage rates available for younger people buying their own homes.

Equity release can also be a useful inheritance planning tool. If you borrow money against the value of your home, the full value of your home no longer applies when calculating your assets for inheritance tax purposes. You do need to remember, however, that equity release can affect your entitlement to state benefits by giving you an extra income stream, so you should always take advice from a fully-qualified adviser.

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