September 2008

Advertising Feature

A moving experience

The 'Right to Move' is a fundamental guarantee and is one of the cornerstones of the SHIP Code of Practice. Indeed, the combination of the 'Right to Move' with 'Security of Tenure for Life' is a persuasive cocktail, which has been at the heart of the industry since its renaissaince under SHIP in the early 90s.

Few advisers will, however, have had any direct experience or comprehension of the moving process itself, for a move will almost invariably take place a long time after the equity release plan was completed. Most moves are triggered by the need to relocate closer to family after a spouse has died, or for mobility reasons if clients can no longer get up and down the stairs.

Equity release plans are designed to extend for the life of the survivor. SHIP endorsed plans must cater for a change in circumstances necessitating a move. However, when a move is initiated, the switch of a plan to the new property will not necessarily be straightforward. In addition to the normal hassle associated with buying and selling a property, elderly homeowners have to ensure that the replacement home meets the relevant property criteria of their plan provider at the time of the move. In practice, this will normally rule out any property of non-standard construction. Furthermore, many providers will not accept retirement homes or sheltered accommodation, including the McCarthy & Stone type developments, which will restrict the favoured option for many retired people in later life.

More disturbingly, there is a potential issue looming, which could restrict the ability to move for those who have entered into lifetime mortgage plans at high loan to values. For example, if house prices do not increase to match the roll up in compound interest, the sum that can be raised against the substitute home may be insufficient to finance the move.

For example: A male homeowner aged 65 releases equity in 2008 and wishes to move to a similarly valued home in 2018. The property value remains constant throughout the 10-year period at £200,000.

He raises £50,000 in 2008 under a lifetime mortgage at a loan to value rating of 25% reducing his equity to £150,000.

During the 10-year period, his mortgage balance rolls up with compound interest to £100,000 reducing his equity by the time he wishes to move also to £100,000.

In 2018, he plans his move to the substitute property. The maximum that he can transfer under the mortgage could be at a loan to value rating (assumed to rise at 1% pa) of 35% of £200,000, which is £70,000. Thus, he will have a potential shortfall on transferring his mortgage of £30,000 and will therefore not be able to move despite the guarantee given to him at the outset unless he can find the money to repay the £30,000 shortfall - which for most will be unlikely.

There is significantly more reassurance for homeowners who have entered into home reversion plans. Providers are obliged to purchase an equivalent share of an alternative property and there is no roll up of interest restricting the outcome. Thus a 60% home reversion on the first property can be switched into the substitute property at the same rate. Furthermore, home reversion providers are better equipped to assist their elderly clients with both the purchase and the sale transactions because they have specialist staff who have sufficient knowledge and experience of such activities. Such support is not generally available from the mortgage providers.

In this regard, a typical case study is set out below.

THE SITUATION

John's former home, in a country village outside Bedford, had a large garden, and while this was ideal for his pet dog Lucy, it became too much for him to manage on his own. Recognising that he may not always be as fit as he now is, former coach driver John decided that a move to a bungalow was necessary.

Originally hailing from Norfolk, John wanted to return to his home county and with the help of Home & Capital's Home Services Property team he soon found a buyer for his home, and a delightful new bungalow to move into. It also has the added advantage of being really close to his daughter, and there is enough garden for Lucy to run around in.

Nigel Hare-Scott
Sales Director
Home & Capital