How do release schemes work?

By THIS IS MONEY
Updated:

 

THERE are three main optiond open to you, and each has its pros and cons.

Roll-up mortgages

HOMEOWNERS borrow a set amount, either as a lump sum or as a series of regular payments. The maximum that can be borrowed depends on the property's value and the borrower's age.

Borrowers pay no interest on the loan while living in the property. Instead, the debt rolls up. The loan and accumulated interest are repaid by selling the house when owners die or go into care.

Loans are offered with either fixed or variable rates of interest. Though such deals are simple, debt can mount. At an interest rate of 7.2%, debt doubles in value in ten years. Most loans come with guarantees that debt cannot grow beyond the property value.

Pros
• No interest to pay during your lifetime or until the house is sold.
• Loans are offered to those as young as 55.
• It is easy to compare loans to find the best deal.

Cons
• It is uncertain how much must be paid back at the end.
• Interest payments can mount up quickly.
• Poorer value for those who live a long time because the interest payments continue to grow.

Home reversion schemes

THE homeowner sells a share or all of the property to a reversion company. The proceeds can be taken as a lump sum, as regular income, or as a mix.

The price paid depends on the owner's age, but will be well below market value. For example, Home & Capital Trust pays about £39,000 for a house worth £100,000 owned by a man aged 65. This rises to £54,000 for a man aged 75.

Owners continue to live in the house. When they die or go into care, the house is sold and the reversion company takes its share.

Pros
• Householders can gain from any increase in value on the house.
• A lump sum and/or regular income is paid.

Cons
• Schemes cannot be reversed.
• It is a poor deal if you die or move out soon after starting the scheme.

Home income plans

UNDER these schemes, the homeowner takes out a mortgage, secured against the home's value. This provides a lump sum, which is used to buy an annuity - a guaranteed lifetime income.

The monthly income pays the mortgage interest and gives a little extra cash. The mortgage interest rate is fixed to give the borrower certainty.

When the house is sold, the original mortgage loan is repaid. The homeowner or their family will benefit from any increase in house prices. Falling annuity rates mean these plans are suited only to older homeowners, aged at least 70.

Pros
• The debt is fixed and cannot increase.
• Income is guaranteed for life and continues even if you go into care.
• There is the chance to benefit from property price increases.

Cons
• Not suitable for those who want a substantial lump sum.
• Other schemes often pay higher income.

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