Equity release schemes, which allow elderly homeowners to release some, or all, of the value tied up in their homes, may have become increasingly popular in recent years, but there are as many reasons to avoid them as to take them out.
Indeed, the recent and damning verdict of consumer watchdog Which? is that they can be expensive, inflexible and should be used only as a last resort.
There are more than 40 variations on the two main types of equity release schemes, lifetime mortgages and home reversion schemes. With a lifetime mortgage, you take out a loan secured against your property that is repaid, with (high) interest rolled up and added, when you die or the house is sold (if, say, you go into care). You are guaranteed that the repayment figure will never exceed the market value of the property, and these products are regulated by the Financial Services Authority.
Home reversion schemes are, on the other hand, currently unregulated, although the Government says this will change – probably next year. Under such schemes, you sell part or all of your property to a financial company (usually at a hefty discount) in return for a lump sum or regular income. From then on you are effectively a tenant, and when you die or move out the company sells the property, reimburses itself and hands the rest to your heirs. Although you won’t need to worry about increasing interest repayments with this kind of deal, the price you get for your house will be well below the market value and, of course, you will lose out on any future price rises in the property market.
The financial implications of these equity release schemes can be huge. Which? quotes the example of a person raising £80,000 through a typical lump sum roll-up scheme on a £350,000 property. That person could end up owing £256,570 after 20 years, or £343,350 after 25 years – which, even if their house has appreciated at the average long-term rate to £700,000, still seems a lot.
Not all schemes are equal, of course, and the market is likely to become much more competitive. Prudential, for instance, already offers what it calls a Property Value Release Plan, a lifetime mortgage that allows customers to ‘draw down’ cash as needed, so instead of paying interest on one huge sum borrowed at the outset, you pay only on what you’ve borrowed so far.
But it is advisable to explore other avenues fully before going down this route. Could you borrow from your family or move into a smaller house and bank the difference? You may even find you are eligible for state benefits or local authority grants to carry out repairs or improvements. If you do choose equity release, make sure your provider is a member of Safe Home Income Plans (SHIP), which commits members to a number of guarantees, including clarity of costs and a ‘no negative equity’ guarantee, and be sure to read every word of the small print.