Money News
Just published research from the Financial Services Consumer Panel shows that to get cash out of the value of your house, downsizing to a cheaper property is generally the most cost effective method, followed by taking out a standard 'lifetime mortgage'. The most expensive is likely to be a 'home reversion'.
The Consumer Panel commissioned actuaries Watson Wyatt to undertake research into the value of equity release products and to provide a comparison of the costs, including the cost of selling and buying a smaller home.
Lifetime mortgages and Home Reversions are the commonest equity release products available.
A standard lifetime mortgage involves a homeowner taking out a mortgage with interest being rolled up and added to the total outstanding loan instead of any monthly payments being made. The debt is repaid on selling the property when the homeowner dies (or goes into long term care), and most have a no negative equity guarantee, so the debt should not exceed the value of the house.
A home reversion, on the other hand, involves the home owner selling all or a proportion of their property at a discounted rate for a lump sum. Then, when the owner dies (or goes into long term care), the property must be sold and the agreed proportion or entire proceeds of the sale price given to the reversion provider.
Data shows that home reversion products came out as twice as expensive as the next most expensive option, if the plan only runs for 10 years, assuming house price inflation of 4% a year.
Using the same assumptions, it seems that a 65 year old would have to live for 30 years to see anything like the same value from a home reversion as a lifetime mortgage.
More specifically, when costs were compared on a house valued at £250,000, and where the owner wishes to release £50,000, trading down was the clear winner.
For example, a standard lifetime rollup interest mortgage, with £50,000 being released on a 250k property - assuming a mortgage rate of 6.25% pa and initial fees of £1,500 and a £200 redemption fee after 20 years - the effective interest rate worked out to 6.42% pa.
For a home reversion plan on the other hand - £50,000 released by giving up 50% of the value of the £250k home - and assuming property inflation of 4% pa and initial fees of £1,500 and a £200 redemption fee after 20 years - works out to a property value of £547,781 with 50% (£273,891) owned by the reversion provider. The effective interest rate in this case is 9.05% pa.
Finally, for those downsizing, assume the £250k property is sold. Also assume that £50,000 is retained, £5,000 is used in fees, and the balance (£195k) is used to buy the next property. Factoring in property inflation of 4% pa the value of the property works out to £427,269 after 20 years. Given the value of the old property would have been worth been £547,781, the cost to the consumer is the difference between the values plus £5,000 in fees. Or put another way, an effective interest rate of 4.5% p.a.
Worth pointing out is that home reversions are due to be regulated by the FSA shortly. Consumers should be aware that there is no obligation on financial advisers to tell customers that down-sizing without taking out any financial product, is likely to be the cheapest option.
04 December 2006 © Moneyextra.com
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