It’s one of those questions I seem to be contacted about all the time…. “Dear Martin, the wife/husband and I are getting on a bit, and we want to get some money out of our house, can you suggest a decent equity release scheme?”
And it’s not surprising: we are a nation where house prices have risen vastly more quickly than incomes, thus many people have high wealth and low income (wealth is a measure of your assets, income of the money coming in). Therefore in essence the question is asking ‘how to I convert wealth to income?’
In its usual salivating way the financial services industry has been quick to respond with ‘equity release schemes’. There are two main variants: either you sell them some or all of your house which you can then live in, usually rent free until you die; or they give you a loan, which is paid off when the house is sold upon death. The problem is when you look at these schemes they’re usually incredibly expensive and you only get mere fractions of what the house is worth back.
To be honest I’ve still not ever seen a scheme which I feel I could ever say “this one is a reasonable bet”, every one leaves me cold and scared for those who take it out. Even those people with no heirs are giving up a huge chunk of their accumulated wealth (which they probably already spend years paying interest on in the form of a mortgage) to have some extra cash now.
Is there anything that can be done?
The easiest (well financially anyway) option is to downscale your house. This is often an emotive issue, but actually by far the most effective way to release value is to sell up and buy somewhere smaller, or less expensive. Of course for some that isn’t possible, but many in this situation are in the position after the children have left home, and have an empty room or so.
It’s important to do this early. One of the great problems is that the older people get the less they willing they seem to be to move. When you’re 50 or 60 it’s not too big a deal, but often people say “I’ll do it in retirement”, this then get puts on hold, but speak to people aged 85 about moving and, even if it makes financial sense, there’s an obvious resistance to doing so at that age. Thus it’s important to try and do it sooner.
What if equity release is the only option?
There are some who will be willing to pay a possibly huge whack, to be able to keep their current home and have extra cash. I’ve chosen not to write on ER as I’m simply not happy with any options, thus the most I can help with is to say, go and read what the financial regulator, the FSA has to say in its downloadable PDF guide to equity release