August 2003

Retired, and finding that your pension isn't paying out as much as you'd hoped, or need to lay your hands on a lump cash sum?

If you are a property owner, chances are that your home has increased in value enormously over the last few years, and guess what - you are an ideal candidate for the finance industry, who would like to lend you money and have the value of your house cover the debt. Then there's the free carriage clock, holdall bag or gold plated biro pen to consider. Sounds just too tempting to resist, doesn't it?

You could opt for an interest roll-up loan where the lender gives you a loan for say, £30,000 based on the current value of your home, and then the interest payments are rolled-up over the years between taking out the loan and your death. At that time, the house is sold and anything left over after the capital sum and the interest are taken away can be passed on to your descendants.

The amount left over may be quite large if the value of the property doesn't decrease in value and you die relatively soon after taking out the loan. On the other hand, if you live for another 30 years and the interest on the loan was e.g. 8%, you'll owe them £30,000 capital plus a whacking £72,000 in interest payments, so £102,000 of your home will be taken to pay back your £30,000 loan. Doesn't sound quite so attractive when you put it that way.

Of course, the value of your home may have increased during that time to offset the cost of paying back the loan, but will it have risen at 8% per annum? Especially when you consider that interest rates (and by implication, wage inflation) are expected to remain low for the forseeable future and that house prices are already stretched to the point where the majority of first-time-buyers can't afford to enter the market to support future price increases.

You might instead consider it far more prudent to sell your present home and instead buy somewhere smaller. Perhaps a bungalow, for the time you find those stairs become more difficult to negotiate. You'll pocket the difference in price, which might be quite considerable, and there will be none of your hard earned savings (or your children's inheritance) going to cover the bonus payments of financial consultants.