The mortgage product market is so highly competitive and the range of offers so diverse, that it’s almost inevitable that some offerings come in for a bad press from time to time. One of these attracting perhaps more than its fair share of bad press in recent years is the equity release arrangement.
Very simply, equity release is a scheme that allows elderly homeowners to free up some or all of the value (the equity) tied up in their place of residence. Despite their indisputable popularity, the Consumers’ Association magazine Which? Has branded the schemes as expensive and inflexible, to be used only as a last resort.
Although there are currently more than 40 variants of equity release schemes, they all fall into one or other of two broad categories – “lifetime mortgages” and “home reversion” schemes. In the former, the owner is offered a mortgage secured against the property for the term of his lifetime. This is repaid by rolling up all the interest payments which fall due either when the owner dies or when the property is sold. The mortgage comes with a guarantee that this repayment figure will never be greater than the market value of the home and such lifetime mortgages are subject to regulation by the Financial Services Authority.
With a home reversion scheme, the homeowner sells part or whole of his property to a finance company, for a cash sum or an annuity, but continues to enjoy lifetime enjoyment of his home (or until he moves out), more or less as a rent-free tenant. When the occupier dies or moves out, the finance company sells the property to recover its outlay and passes on any remaining proceeds to the occupier’s estate. Currently, such home reversion schemes are not subject to regulation by the Financial Services Authority.
So, what is wrong with either of these schemes, both of which give elderly homeowners the chance to enjoy the considerable amount of equity likely to be tied up in their home (when most properties are likely to have doubled in value since as recently as the 1990s)?
The answer – as is usually the case with all financial services products – is that there is nothing at all wrong in principle; it’s all down to the detail of cost and benefit. In other words, it’s absolutely imperative to do the sums, consider all the alternatives, and judge whether the amount being offered by way of a lifetime mortgage or home reversion fairly represents the present and future value of the property. Critics have described the schemes as “expensive” because of the generally “high” rates of interest attached to lifetime mortgages and the generally “low” prices offered to homeowners in home reversion schemes.
But the terms “high” and “low” are of course relative. Competition with the market and the proliferation of products to suit different needs means that “fair” is whatever the market will sustain.
Given the particular nature of these types of scheme, it makes sense to discuss any interest in equity release not only with a trusted independent financial adviser, but also with members of your own family. Clearly, many such schemes will affect any expectations of inheriting the “family home” that other family-members might have. Similarly, any younger partner, relative or friend who might be sharing your home with you at present might (depending on the terms of the particular scheme) be obliged to find other housing if you die.
So, here’s what to remember about Equity Release schemes:
* Suited for older homeowners who may have a lot of equity tied up in their home
* There are two types: lifetime mortgages and home reversion schemes
* This type of borrowing has attracted a lot of negative press due to high costs, so always thoroughly research the product before signing up
* If you sign up to an Equity Release scheme and have friends or relatives living with you, check out what their rights to the property would be when you die to ensure they are not without a roof over their head.
