View Point
January 26, 2007

“Equity release” Can it ease your pension worries?

Many senior citizens today have arrived at a point in their lives when their pensions and savings are not stretching as far as they used to, and they may actually be worried that the resources at their disposal are not sufficient to give them the comfortable lifestyle they had hoped for. When combined with the fact that people in general are living longer, the need for extra cash to help pay bills and maintain the way of life a retiree is accustomed to, has become a real challenge. There are however solutions to these problems which are well within the grasp of many retired persons.{{more}}

While some families may opt to sell their property and down size to a cheaper home, it would be a major upheaval to leave the home they love and go through the stress of moving to a completely new environment. Instead, the retired couple could turn to ‘Equity Release’ in order to make the most of their biggest asset to generate cash and in the process continue to live in the family home for as long as they wish. Such a plan allows you to release part of the money locked up in the value of your home and it could even be converted to a guaranteed monthly income for life. Over the past twenty to twenty five years, the price of the average property in St. Vincent and the Grenadines has risen dramatically. Consequently, most people’s greatest asset is their home and in some circumstances, it would make good sense to capitalize on this wealth. Instead of being house rich and cash poor, with insufficient income to cover monthly bills, the family could exercise the option to release a portion of the equity tied up in the family home to meet the shortfall in their current income and enhance their living standards.

Pensioners should however weigh up their options carefully and seek advice on the product which is most suited to their circumstances. Lifetime mortgages for example are loans where the interest is not paid monthly, but is added to the sum owing, increasing the overall debt. In the case of equity release, interest rates are usually fixed with the size of the loan doubling in about twelve years. The loan will be repaid after the occupants leave the home and the property is sold. A product referred to as a home reversion plan works differently. The company buys a stake in your home. You can remain living there rent free but when it’s sold, the reversion company takes its cut from the proceeds. One problem for those persons considering equity release, is trying to weigh up the true cost of each option. Costs will vary significantly depending on how long people live and what happens to house prices in the mean time. A Lifetime Mortgage becomes poorer value for money, the longer someone lives because interest is charged on the accumulated interest. By contrast, a home reversion plan gives worst value if the retiree dies soon after taking out the plan.

Pensioners are going to need sound advice in managing their financial affairs, and the options they can choose. Selling their home is perhaps one of the earliest options to consider. However, the emotional distress involved in the search for a suitable property and the upheaval entailed in relocating after living for a generation or more in the home to which you have become attached, should not be down played. On the positive side a smaller home is likely to have lower energy and maintenance costs as well as lower property taxes. For these persons opting for equity release, it must be their decision as to how much of the value of their home they will use to generate extra cash which can be used for a variety of purposes including repairs to the home, taking a well deserved holiday, or even contributing to the education of a grandchild at a time when it is most needed. While the service providers may do their best to explain the products they offer with the uttermost care, there is still a role for an independent body like the Consumers Association to garner actuarial assistance in doing some number crunching as a prelude to drawing up a checklist of questions to be considered by pensioners before reaching their decision.