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Inside Money Thursday, 21 August, 2003, 13:41 GMT 14:41 UK
Equity release schemes
Graphic showing older couple
Many people are looking for more income in retirement
Many older homeowners are unaware it is possible to release the equity in their property. This Inside Money guide explains the options.

Two types of scheme are available. Homeowners generally need to be aged at least 60 to take advantage of either.

Home reversion scheme

In this scheme the client sells their home, or a percentage of their home, to a plan provider.

In return they receive a cash lump sum or a monthly income, or a combination of both.

The amount available to borrow is normally dependent on age or gender - for example the younger you are, the less you receive; and it is taken into account that women are expected to live longer.

The person can remain in the house rent free until the last remaining borrower (if a couple) dies or is transferred into long term care.

When the property is sold, the plan provider reclaims their percentage with the remainder going towards specified beneficiaries.

However, the same percentage of any future rise in the value of the home would also belong to the plan provider.

Cash release scheme

With this scheme the homeowner takes out a fixed rate interest only mortgage on their property and uses the borrowed money to purchase a regular income.

There are no monthly repayments to be made as the interest is accumulated over the life of the mortgage.

When the borrower dies or is moved into long-term care, the original loan plus accumulated interest is repaid.

The longer you live the larger the interest that will be due.

It is important to consider taking out a fixed interest loan with a guarantee that the amount owed will not exceed the value of the house, therefore ensuring no risk of negative equity.

Bad reputation

Home income plans earned a very bad reputation in the late eighties and early nineties and as a result have now been outlawed.

These plans were mortgage-based plans where homeowners raised a lump sum by taking out a mortgage for a portion of the property's value.

This lump sum was then invested in a bond. The returns from the bond were expected to provide homeowners with an income, as well as helping pay off the loan.

But the mortgage borrowing was charged at variable rates. So when rates rocketed, as they did in the late eighties, the cost of the loan outstripped the income from the bond investment.

Suddenly homeowners were forced to make extra payments to pay off the mortgage - and were worse off than before they took out the scheme.

To make matters worse, poor stock-market performance meant that the bond investments fell in value.

The West Bromwich Building Society was one of the worst offenders and it has since had to pay out almost 30 million pounds in compensation.

Several other lenders and financial advisers have also had to compensate customers who lost out.

In 1991, the City watchdog - then the Securities and Investment Board - outlawed stockmarket-linked home-income plans.

The Safe Home Income Plans (SHIP) organisation was founded in the same year, largely to help restore confidence in the market.

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