Beware of the retirement-home debt trap

Most people think that owning a house of one kind or another is a route to freedom. Sometimes it is, but all too often it is also nothing but another passage into debt slavery.

We've written before about the misery of those who own holiday flats in Spain that are now in negative equity and are impossible to sell. It's also been noted many times that shared ownership isn't all it's cracked up to be (see here and here, for example).

And we've looked at old fashioned time shares. If you have one of these you'll know by now that they are hard to give away, let along sell, and if you've inherited one you'll know that the maintenance fees just keep coming. This is one of the few liabilities that doesn't always disappear on death.

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But there's a relatively new entrant into the property slavery world that is only just beginning to get attention - the retirement flat. Around 200,000 people own these. On the face of it, it isn't a bad idea at all. You get to live in a community with other over 55s. You get alarm systems, wardens and various communal areas, all of which should make living independently easier for longer. And you get to keep on owning your own property too. But unfortunately, as with so many things involving money in the UK, while the theory is good and some operators are honest and owner friendly, the practice sometimes isn't.

The thing to note is that these properties are usually sold as leaseholds rather than freeholds. That's not necessarily a problem at all. But the lease agreements on this kind of flat can be dishearteningly restrictive particularly if you need to sell.

Let's say you own a retirement flat but have to move into care, or perhaps that you inherit a retirement flat. They aren't that easy to sell (presumably in part because they can be sold to such a small part of the total market) taking an average of 236 days to get shot of, against 148 for the average property, according to the Sunday Telegraph. But while you wait to sell, the service charges (and sometimes ground rent) will still have to be paid. That might not be unreasonable after all, if one flat isn't paying up the others have to cover the difference. But service charges don't come cheap. Think anywhere from £3,000 a year up.

You might also find you are obliged to bring the flat up to 'as new' condition pre-sale, that you can't rent the place out or that if you can you have to pay 'transfer fees' to the freeholder. And when you do sell you will usually find that you have to pay another set of transfer fees usually of around 1% of the sale price of the property, but sometimes much, much more. The Sunday Telegraph suggests some freeholders charge up to 5%, but others report up to 12.5% although the worst offenders are now being investigated by the OFT. And if you want to improve the property to sell it faster? You might find you have to pay a fee to do that too.

On the plus side, retirement properties often serve their owners very well while they are living in them (assuming they can afford the service charges) and unlike most timeshares they do have some value it is just that they don't have quite as much as they used to. This one appears to have been listed at £114,000 in 2008, but has now either been sold or taken off the market at less than £60,000.

There was some talk back in 2008 about how the retirement home market would be insulated from the crash. That doesn't seem to have worked out