Home income plan

Methods of releasing equity

This is the excess of the market value of a property over the outstanding amount of any loan or loans secured against it.

Releasing equity means using the excess value to obtain capital or income which can be utilised for another purpose.

Home income plan

An elderly home owner, aged between 60 and 70, takes out a mortgage on their property.  Lender will restrict the lending to a percentage of the current property value and the percentage depends on the applicant's age, eg 40% or 65%  The loan is covered by the Financial Services Authority.

The capital released can be used to:

• provide an annuity (income); or

• invested in an income producing vehicle; or

• capital to meet the borrowers needs.

Current versions of the Home Income Plan require no interest payments to be made to the lender during the lifetime of the borrower - the interest is rolled up and is repaid, together with the capital on:

• the death of the borrower or

• if the borrower decides to move.

The main disadvantages are:

• annuity rates have fallen;

• tax relief on mortgage interest was withdrawn from plans taken out after 8 March 1999. Plans taken prior to this date still qualify for tax relief at 23%, but only on the first £30,000 of the loan. The main providers of home income plans have joined together and formed a type of trade association called Safe Home Income Plans (SHIP). This has established a Code of Practice that is designed to safeguard the interests of borrowers.

The main safeguards are:

• the applicant must be encouraged to seek independent legal advice to ensure that they fully understand the risks involved and the fact that any children and other beneficiaries will receive a reduced inheritance;

• any negative equity situation that arises will be funded by the lender, ie the

amount that has to be repaid will not be more than the price that is obtained when the property is sold;

• the borrower will be entitled to remain in his home for the rest of their life - in the case of joint borrowers this applies to each of them;

• the plan must be portable, i.e. the borrower must be allowed to transfer the loan to another property, although part of it may have to be repaid if the value of the new property is insufficient to cover it.

Home reversion scheme

These schemes are an alternative to home income plans and involve the homeowner selling all or part of their property to the lender in return for a capital sum.  No interest is charged due to a change of owner rather than a mortgage being created. The provider decides how much to give the homeowner in return for the property or share in it and this is dependant on life expectancy.  As no mortgage is created the scheme is not covered by mortgage regulations. The provider will have to wait for the death of the borrower to receive the capital.

Anyone taking a home reversion scheme must be made aware that if the property is sold, then the heirs will not benefit from any increases in its value. On death of the last survivor the property will be sold and all proceeds are retained by the scheme provider. If only part of the property is sold, the relevant proportion of the sale proceeds on death pass to the deceased's estate.

Most home reversion schemes are covered by the SHIP Code of Practice and offer the same
safeguards as home income plans.

Shared ownership

This effectively combines rental with owner-occupation.  The system is used extensively by housing associations in collaboration with local authorities and private mortgage lenders, and enables people on lower incomes to progressively become owner occupiers.

A borrower purchases a certain 'stake' (often 25%) in a property with the aid of a mortgage loan, whilst renting the remainder.  The borrower has the option to buy further stakes later, thereby reducing the rental element and this is known as 'Staircasing'.

When the property is eventually sold, the equity is split between the vendor and the housing association or local authority according to the proportion that is owned and the portion that is rented.

Mortgage rescue schemes are a form of Staircasing in reverse and can be used to assist owner occupiers with financial difficulties to sell a share in their property to a housing association.

For a mortgage enquiry please contact

Details supplied here will be strictly confidential!