With the increase in property prices over the last twenty or so years many elderly people find themselves in the situation where they have little income but are living in a valuable asset. There are various ways of releasing this capital to provide extra income.
This is a complex area and it is imperative when considering these schemes to take expert advice preferably from an adviser who holds the Chartered Insurance Institutes professional qualification CF7 in Lifetime Mortgages. f you are in receipt of means tested benefits you should be aware that these might be affected if your income increases.
Raising capital from the property to buy an annuity
In these circumstances the loan is usually restricted to £30,000 and the money raised is used to purchase an annuity. Part of the annuity is used to pay the interest on the loan and the rest can be used to boost the client's income.
Reducing annuity rates plus the relatively low capital sum have led to these schemes falling in popularity over the years. They do have the advantage that the size of the loan remains constant because the interest is being paid.
Home Reversion Schemes
In these schemes the property is sold to a company (usually an insurance company) in return for an income for life. Should nursing home care be required later the property can be sold and the income will be increased to help fund the nursing home fees.
Some schemes allow for a percentage of the value of the house to be retained by the client. This allows for the client to pass on some of the value of the property to their beneficiaries when they die.
This scheme allows for a capital lump sum or, more rarely, an income to be taken as a loan form the property. Unlike a traditional mortgage the income is not paid but added to the loan. Most companies offering this scheme have agreed to abide by the principles as outlined by the Safe Home Income Schemes (SHIP). Members of SHIP have a clause which states that the loan taken on the property will never rise above the value of the house.
The disadvantage of these schemes is that the client loses the ownership of the property and does not benefit from any future rises in house prices, although some schemes do provide rising income based on the underlying value of the property portfolio.
The value used by the insurance company to determine the income paid is usually heavily discounted.
Although most schemes offer a fixed rate of interest, the interest added to the loan is compounded, which means that the longer the loan has been held the faster it increases.
If house prices fail to rise, or suffer a fall, the value of the equity in the property will be eroded.
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