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Equity Release: Home Income Plans (HIPs)

What are they - How they work

(A subset of a Lifetime mortgage)

Home Income Plans
come under the umbrella term of Lifetime Mortgages.

A cash sum is released from your property and this is used to buy an Annuity which in turn pays out a monthly amount.

Part of this is used to pay the interest bill of the loan and the remaining balance can be used for an income.

The original loan is then repaid when the property is sold, or you move into long term care. The advantage with a Home Income Plan over a Roll Up mortgage is that as the interest is repaid every month the loan doesn't increase over the years.
The current problem with Home Income Plans

Annuity rates have been falling now for several years and this means they don't pay much. So for a Home Income Plan to be feasible for most people an enormous amount of money has to be released from a property.

People will probably find that the annuity payout only covers the interest bill and therefore there is nothing left over for an monthly income. If this is the case then common sense suggests there is zero point in taking out a Home Income Plan in the current low interest rate environment.

An example of a Home Income Plan
Because annuity rates are so low Home Income Plans are normally only an option to those aged 75+.
  • John is aged 80 and wants to release some money from his property to give a monthly boost to his present pension income
  • He releases £45,000 using a Home Income Plan with an interest rate of 6.5%
  • The £45,000 is used to buy an annuity with the first £243.75 of income it receives paying interest bill on the mortgage
  • John receives the balance of around £300 every month
  • He dies 10 years later, the house is sold, the lender is repaid the loan amount of £45,000 and the equity balance is paid to John's estate
  • Note, that over the 10 year period John paid around £29,200 of interest
Advantages - Home Income plans
  • Regular income for life - Because an Annuity is bought with money released from a property an income is provided for life even if you live to 101+

  • The original loan won't grow - Part of the income the annuity pays goes towards paying the interest bill on the loan. This means that unlike a Roll Up mortgage the loan won't grow over time and hence any increase in the value of the property can be passed on to beneficiaries

  • Regulated by the FSA - Always good to have a financial product regulated and monitored by the financial regulator, the Financial Service Authority (FSA)
Disadvantages - Home Income plans
  • Annuity rates are low - This means that these loans are usually only available to people over the age of 75

  • Annuity rates are often fixed - This means that over the years inflation will erode the value of any income

  • The annuity you buy might not be the best rate - Even though annuity rates are low there is still a tremendous difference between the best paying ones on the market and the worst. But the equity release firm you do business with might force you to buy their annuity which is of a low value

  • State benefits might be affected - money received to equity release could seriously alter the amount of benefits or state support you're able to collect. It is critical to research this matter further

  • Might increase the income tax you pay - Although the original cash is paid out tax-free if you use this money to generate an income further tax might have to be paid

  • Sheltered accommodation - Many ER providers won't lend against warden assisted sheltered housing or retirement flats

  • Hefty early repayment penalties - sign up but want to cancel the deal at a later stage and you could find there are hefty early repayment penalties
Where and how to buy - Buying tactics and tips

LearnMoney.co.uk Comment:
Home Income Plans look to be a dying breed in the world of Equity Release because of the poor incomes received from annuities. Plus, the annuity landscape doesn't look like it's going to get positive over the coming years - long life expectancy has a lot to do with it as well.

So by all means put some research into Home Income Plans and what's available on the market because financial engineering means the firms selling these products can often come up with new twists and ideas.

Finally, don't forget that Equity Release, including Home Income Plans, should be viewed as a massive financial decision which can have long ranging effects. So use some common sense when thinking about whether to sign up for a deal or not, and this includes -

  1. Spend as much time as possible on researching what you're buying and looking carefully at both the charges involved and also the small print
  2. Think long and hard about the most prudent way to use any money released and work on the assumption that you will live for many years
  3. Seriously consider all other financial options including downsizing your property - See Alternatives to Equity Release

Final Thought - Being debt free is later life is something to aim for

Many people borrow money all their lives whether on credit cards or a mortgage etc. So it's not a bad move to head into our twilight years with zero debt and few obligations. But a lifetime mortgage creates yet more debt and a debt that might increase substantially should you live a long time.

It therefore makes sense that Equity Release, including Lifetime mortgages, should be considered only as a last resort.

FREE Equity Release Guide

  • This LearnMoney guide offers a simple 5 Step process outlining exactly how to properly research the Equity Release market

  • It make sure you ask the right questions and get proper answers

  • Concentrates on the all-important costs and flexibility of the different Equity Release schemes

  • More details and to download your FREE copy

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