Page last updated at 23:04 GMT, Tuesday, 23 September 2008 00:04 UK

Raising funds with equity release

Money Talk
By Philip Spiers
Co-author of Care Options in Retirement

Philip Spiers
Philip Spiers

Reports from the Commission for Social Care and Inspection (CSCI) highlight that our care system is failing.

That is one reason why significant numbers of people each year try to cash in on the value of their homes, to raise sufficient money to look after themselves in old age.

The pressure to do that seems likely to increase.

There is an increasingly sharp divide between those in the formal care system and those outside it - and an increasing number are falling outside it.

In many areas, only the most needy are receiving care provided or arranged by their local authority.

At the last count, 62% of councils have raised their eligibility criteria for care services to "substantial" or "critical", denying those with moderate or low care needs the support they may need.

As a result, the number of households receiving supported home care from councils continues to fall dramatically.

Equity release should still be regarded as last-resort funding when all other avenues of raising finance have been exhausted

It is estimated that 6,000 older people with intensive needs and 275,000 older people with less intensive needs receive no services or informal care.

Unless they can afford to provide for themselves, they have to rely on family or friends, do without or, if they own their own home, turn to equity release to finance it.

Last resort

Equity release has received bad press in the past but in recent years the financial services industry has cleaned up its act with schemes now charging fairer interest rates and giving "no negative equity" guarantees.

However, equity release should still be regarded as last-resort funding when all other avenues of raising finance have been exhausted.

Other potential sources of finance include borrowing from your family, using existing savings, unclaimed benefit entitlement or grants, taking in a lodger or moving to a smaller property.

Even then it is essential that independent advice is sought from a financial adviser that specialises in this area to ensure the most suitable and competitive scheme is chosen, and that any finance raised would not affect current entitlement to state benefits or support.

Taking out any form of equity release could adversely affect the eligibility for means-tested benefits or other support available.

The amount of pension credit and council tax benefit that a person can claim may be greatly reduced if a lump sum is released from their home, along with a range of other benefits and grants.

This could add up to hundreds or thousands of pounds each year.

Flexibility

Most complaints about equity release come from children who do not find out about it until their parents die and suddenly realise a large chunk of their inheritance has been absorbed in repaying loans.

Thatched cottage
You may still need to move house some time after raising money

It is important to involve the family right through the equity release process as they may be able to assist with alternatives, and it is helpful to keep them informed if they are executors of the estate.

Any plan you choose must not only meet immediate needs, but must be flexible enough to adapt to any life changes in the future.

If needs change and the equity release plan taken cannot meet these changes it may be necessary to switch provider.

A number of the equity release providers available do not allow their plans to be transferred to sheltered housing, care homes or retirement properties.

Consequently, it is important to consider what additional charges, such as early repayment charges, will apply if there is a need to repay the mortgage earlier than expected.

If the early repayment charge combined with the existing borrowing is too high it may restrict a move to more suitable accommodation if needed or even prevent the switching to an alternative plan or provider.

Penalties for moving

The early repayment charges currently applied within the equity release providers vary enormously.

Some have a maximum early repayment charge of 5% while others can charge as much as 25%.

It is also important to establish whether the charge will apply to just the original borrowing or to any accrued interest as well, as this can also make early repayment more expensive.

Some equity release providers only apply their exit penalties during the first five or 10 years of the plan while others will apply exit penalties for the full duration of the plan.

So, equity release schemes may look like the ideal solution to people looking to fund their long term care, especially as funding from local authorities becomes more stretched.

But, these schemes could lead to a number of problems in the future if not carefully researched.

Anyone considering equity release should always make sure they have taken independent financial advice, and have considered all other options before signing on the dotted line.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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