More people in retirement are turning to their homes as a source of cash. This usually means using a specialist equity release provider – but could an arrangement popular in France provide an alternative solution? Welcome to the strange world of the ‘viager’. Article by Nick Green.
Going up: the cost of living, life expectancy and the state pension age. Going down: anticipated spending power in retirement. It’s no wonder that UK pensioners and those soon to retire are looking beyond both the state pension and their private pensions to other sources of income in later life. The housing boom means that homeowners are usually living in their single biggest asset – and more and more people are turning to equity release in order to access some of that value without selling up.
Equity release can be a very effective way to capitalise on the value of one’s home. However, it’s not without its drawbacks and risks. In particular, if you choose a provider without first taking independent financial advice, you could end up signing an agreement you later regret.
This is what happened to an elderly North London couple who in 1994 entered a form of equity release known as ‘home reversion’. Under this arrangement, you sell a large share of your home to the provider, on condition that you can live there until your death. However, in this case the provider got by far the better deal. The couple received only £52,000 for a 90 per cent share in their house, which by the time of their death was worth nearly £1m. To make matters worse, the company informed the couple’s bereaved daughter that she had only four weeks to clear the house so that it could be sold.
This short notice period tends to be peculiar to home reversion schemes – lifetime mortgages, the other form of equity release, usually allow up to a year for the house to be sold. However, lifetime mortgages can have their own drawbacks, such as compound interest growing the debt until the whole value of the property is used up. If you like the concept of a home reversion scheme but are wary of stepping into a bad deal, there is a way to do it on your own terms that may give you more control.
Will the UK get a taste for the French ‘viager’?
Peter Yielding of St Albans made headlines when he put his house on the market for around £200,000 less than the typical asking price in his street. The 64-year-old had one condition: that he be allowed to continue living exclusively in the property rent-free for as long as he needs to. His offer raised eyebrows on UK social media, but not so many in France, where such arrangements are commonplace and have a name: ‘viagers’. Under the viager system a property is sold in exchange for a regular guaranteed income (known as a reverse annuity), while the seller continues to live there until their death (or until they go into residential care). Mr Yielding’s proposal differed in that he was asking for a lump sum, but the principle is similar.
A viager arrangement is a gamble for both the seller and the buyer. France’s most famous viager involved a man, Andre-Francois Raffray, who bought an apartment from 90-year-old Jeanne Calment. Mme Calment proceeded to live another 32 years to become the world’s oldest woman, outliving Raffray himself who by the time of his death had paid her the equivalent of £140,000 for no benefit whatever. In effect, both seller and buyer are placing bets on how much longer the seller will live.
Unusual though it might be for the UK, setting up this kind of arrangement is a relatively simple matter, requiring only a legal contract drawn up by a solicitor which both parties must sign. Consequently the seller can have a much greater degree of control over how the arrangement works, ranging from the price at which the property is sold, to the timescale of when the house must be cleared after their death, and so forth. Potential downsides may be a greater initial cost in terms of legal fees, along with the challenge of finding a buyer and persuading them to agree to your terms. Nevertheless, the case of Peter Yielding shows that there is a potential market for a UK viager system or similar, which enterprising pensioners may soon start to explore of their own accord – without the need for middle-men.
You can find out more about equity release and other sources of retirement income by speaking to a financial adviser.