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New 'retirement booster' scheme offers regular income from your house - at a price

New 'retirement booster' scheme offers regular income from your house - at a price

A new “Retirement Lifestyle Booster” mortgage offers to allow older homeowners to draw a fixed income from the value of their property.

The scheme, from Family Building Society, is unusual in that instead of a single lump sum, the property owners sign up to receiving a fixed income for up to a decade.

Interest is payable on the loan, and it is deducted from homeowner's monthly income.

There is also an option to take an initial lump sum at the start.

In theory, when you reach the end of the term, all the interest will have  been paid, leaving the exact amount you borrowed as the final loan balance.

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To pay this, you sell your house and move somewhere cheaper. The aim of the deal is to enhance pensioners' monthly income while they're still in their own properties and in need of extra cash. The assumption is that they will inevitably sell or downsize.

On the surface it looks simple enough, but there are a number of complexities to consider.

Firstly, the interest deducted from borrowers' "income" is based on the interest cost spread out over the life of the loan, rather than how much you have borrowed at any one time.

The main danger is that the interest rate is variable (it generally follows Bank Rate, but is not required to) and if it were to rise, your income could diminish.

An example rate given for someone borrowing £122,000 for 10 years is 3.44pc. This is far cheaper than traditional equity release mortgages - but with the latter the interest rates are generally fixed.

Inflation is a concern too. It tends to rise in line with rates, so the spending power of your fixed payment could be eroded by inflation at the same time your interest payment increases. 

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One useful flexibility is that borrowers can halt payments and pay off the loan balance, for a £100 exit fee.

This would probably involve selling the property earlier than expected to pay off the loan. There is an early exit charge if you want to sell out within the first three years. 

As the interest payment you make is based on an average rather than the exact amount borrowed, an early exit could mean you have overpaid interest up to that point. In that case your loan balance would be reduced to reflect overpayments.

Adrian Anderson, an equity release specialist with broker Anderson Harris, said: "A lot of people are drawn by low headline rates and pay too little attention to the issue of whether these are fixed or variable.

"We are at a period of record low rates. The likelihood is that rates will rise from here.

"Anyone on restricted income should be especially alert to the risks of rising interest costs. This is one point where, arguably, it would be especially important to opt for a fixed rate."

Up to 25pc of a property’s value can be borrowed, and a lump sum equivalent to up to two years worth of monthly payments is available.

The minimum you can borrow is £60,000 on a mortgage free property and £45,000 on a mortgaged property, and you can transfer the scheme intact if you want to move house.

The minimum age is 60 and max 79, and Family’s standard range of potential mortgage fees apply. These include an application fee and product fee, which can run into thousands depending on the amount borrowed.