Equity Release and Home Income Plans

Are you one of the increasing number of people who are living in a valuable, mortgage-free property, yet are struggling to manage on the income you receive? The good news is that you don’t have to sell your family home or trade down to a smaller, less desirable property to make ends meet. Many people in this situation take advantage of a ‘home income plan’ (also known as an equity release plan), although they won’t suit everyone.

A lump sum or an income for life?

With a home income plan, you can either receive a lump sum or be paid an income for life. And you are absolutely guaranteed the right to remain in your home for as long as you wish – for example, until the death of the second partner, if you are married. So you could stay in your home, taking advantage of the fact that it is probably worth far more today than you paid for it.

You have to be clear about what you could be giving up. But if you have no children, or your children have already made their way in the world and do not expect a large inheritance from you, a home income plan could be the way to secure a bigger retirement income.

How the plans work

There are two types of home income plan. With the first you effectively take out a new mortgage against part of the value of your home. The amount of money the process raises is either handed to you as a lump sum, or is used to buy an annuity to provide a fixed income for the rest of your life. On your death, the interest on the mortgage is in most cases deducted from the value the home sale achieves.

If you were to die shortly after taking out a plan, little interest may be due, and your estate may still enjoy a reasonable value from the sale of the property. But even if you live for many years after taking out a plan with a high loan value ratio, the total bill can never be for more than the property value at death. In this case the lender loses out and you will not be forced to leave the property.

Alternative option

The second type of plan necessitates you agreeing from the outset to give up a certain proportion of your home’s value when it is sold on your death, or on the death of your surviving spouse if you are married. In return you again receive either a lump sum or an annuity. If, to get a specific lump sum, you give up 60 per cent of your home’s value, then 60 per cent of its eventual sale value goes to the home income plan provider, regardless of what happens to property prices in the meantime. The remaining slice is yours to pass on to heirs or good causes in the normal way.