Graeme Leckie: Finding equity in an unequal world

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IT IS not just first-time buyers who are feeling the pinch from the credit crunch. You have a guaranteed pension income and substantial equity in your house.

You have been a home owner for decades but, in the words of Scotland manager Gordon Strachan, the “Kestrel-drinking, devil dug-owning” non-educated delinquent has a stronger chance of obtaining a better mortgage than you.

Lending options for the aged have significantly reduced since 2007. Virtually all lenders have restricted their lending criteria to the over-65s. This is partly due to market conditions and a more intrusive regulatory regime. Very little of the recent £80 billion capital injection into mortgage lending is being filtered down to a significant part of Scotland’s population.

So what are your options if you are looking to release equity from your home? Downsizing may not be a viable option in a stagnant housing market. Even if you have substantial pension income, it is extremely difficult to obtain mortgage lending beyond the age of 75, and any new borrowings may well have to be repaid on a capital and repayment basis over a short period of time, making the monthly payments unmanageable.

Lifetime mortgages historically were a more palatable alternative to equity release. This involved taking out an interest-only mortgage, with the loan being repaid on death from the estate, but currently there are no lifetime mortgages available in Scotland.

With a home revision plan, you sell a fixed share of your property, anywhere between 30-100 per cent, to a third party, who pays you a percentage of this amount, with no interest added. They have never been popular, receiving only a 3 per cent market share (source: KRS market monitor 2011.)

So that brings us to equity release. A lump sum is released, with any interest being rolled up against equity in the property. The money is repaid from the estate. Equity release has historically attracted a negative press due to high rates, fees and concerns about the impact that it has on inheritance.

Fortunately, the market has become more sophisticated. Rates are about 2 per cent lower than in 2007 and many lenders are offering free valuations and cashbacks to help meet costs.

There are products available that limit the amount of equity that is taken from the estate, ensuring that money can still be passed on to loved ones. You can also pay a monthly contribution initially to minimise the roll up of interest (or even treat it as an interest-only loan) and then switch to the standard plan with no monthly payments at a later date. Equity release plans that operate under the Safe Home Income Plans guarantee that you will never lose your house or owe more than the property is worth. You can still move house, downsize and repay the debt, or move and take the loan with you.

However, equity release is not for everyone. It will have an impact on your estate, and could affect your tax and state benefits.

• Graeme Leckie is an independent financial adviser at Kelvin FP