Equity release as pension plan

The idea of using your house as a cash machine with which to fund your retirement has gone mainstream, with the announcement that Nationwide is the first major mortgage lender to offer it.

The building society’s new lifetime mortgage allows homeowners aged between 55 and 85 to take out an interest-only loan against their house. You don’t make any monthly repayments; instead, the loan is repaid in full when you die and the house is sold, or you sell your house to move into care.

Equity-release products such as this capitalise on the fact that many older people have a lot of money tied up in their house, but don’t want to downsize. Over-55s hold as much as £1.8trn-worth of property around the UK, reckons Nationwide. Prior to the building society’s entrance to the market, equity-release products were mainly sold by insurers and smaller specialist providers.

But while a lifetime mortgage may sound like a great option for people who are not ready to move out of their family home, it’s important to be aware that this kind of borrowing is expensive. That’s because although you make no repayments on the loan, interest is added to your debt every month, so the compound interest could leave a large debt to be repaid out of your estate when you die.

The interest rates on equity-release products can be high, “meaning the final amount owing can be huge – in some cases, large enough to wipe out any remaining equity in the home,” warns Stefanie Garber of Which. Yet despite the fact that equity-release products could mean you give away your house for far less than its market value –  for instance, borrowing 50% loan-to-value (LTV) but losing the rest in interest charges – they continue to gain in popularity.

Nationwide’s product will allow you to borrow up to £460,000, but not more than 55% of the value of your house. The interest charged ranges from 3.8% to 4.8%, depending on your LTV. Although you can repay up to 10% of the loan every year, early repayment fees do apply. (Although you may be able to avoid this by downsizing, as it is possible to transfer your mortgage if you move.) If this is something you’re considering, make sure to read all the small print attached.

Are premium bonds worth the punt?

National Savings and Investments (NS&I) has put up the prize rate on its premium bonds. The annual prize rate will rise from 1.15% to 1.4% on 1 December. That means a bond-holder with average luck should win enough prizes over the year to get a 1.4% return on their savings.

As well as increasing the prize rate, NS&I has added more prizes, with 2.9 million set to be handed out in December, up from 2.4 million this month. There are still only expected to be two £1m jackpots each month, but one extra £100,000 prize and four more £50,000 prizes. All in all, your odds of winning will go up from 30,000-to-one to 24,500-to-one.

Just remember, if you don’t win a prize, your money will be shrinking in real (after-inflation) terms. If you want the certainty of interest, plus the chance of a prize, you might be better off saving into Halifax’s Isa Saver Fixed account (0.5% interest). If your balance is over £5,000, you can enter the prize draw, which hands  out £550,000 in prizes every month.

Or, put your money into the best-paying savings account (1.32% from Charter Savings Bank) and buy a lottery ticket for a 54-to-one chance of winning a prize and 14-million-to-one odds of winning the jackpot.

In the news this week…

• “Smart shelves”, already a common feature in European supermarkets, will soon arrive in the UK, says Tim Walker in The Guardian. These are electronic price displays that allow retailers to change prices depending on the time of the day. M&S has already experimented with selling sandwiches more cheaply in the morning, to ease the lunchtime rush.

As this shows, so-called “dynamic pricing” can be advantageous for the consumer as well as the retailer, and is not to be confused with the much more controversial “personalised pricing”, whereby some customers – those who live in an affluent postcode, for instance – are offered products at higher prices. Though this will outrage some, in a way it is a return to earlier times, when traders would judge the level at which to set a price on factors as simple as a customer’s accent or “cut of their cloak”.

• Gold is being brought into the digital age, with the launch of a debit card and app that will allow people to pay for goods in gold, says the Financial Times. Fintech group Glint has joined forces with Lloyds and MasterCard to create an app that lets people load credit in different currencies, which is then used to buy a portion of a physical gold bar. Customers opt to pay for items with gold or currency at the checkout, and use their MasterCard to pay. Glint is designed to allow people to protect their money in an age where central banks keep issuing more currency, says co-founder Ben Davies – although clearly the value of gold fluctuates too.

• Watch out if you’re booking a holiday online, says Ben Clatworthy in The Times. Fraudsters are using “ever more complex tactics to con holidaymakers”. Scammers target prestigious areas and often base their fake websites on legitimate sites, placing advertisements for properties they don’t own and paying to appear at the top of Google search results.

Warning signs include suspiciously low prices, high availability and recently created websites (check domain registration dates via Whois.com). Always pay by credit card, which offers more protection if you pay the holiday firm direct, and ideally book with a travel agent who is a member of trade bodies Abta or Aito.

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