The black sheep of mortgages moves to regain lost trust

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The Independent Online

It's there to help elderly people liberate the cash that's tied up in the value of their homes but equity release still suffers from a bad image.

Four in 10 children - most probably those aged between 35 and 44 - would rather reach into their own pockets to help their parents financially than allow them to take out such a complex and risky loan, according to new research from Nationwide building society.

Fear of a financial hit on an inheritance is the main motivation, says the society.

"Younger people are more likely to help because they have a longer wait until their own retirement and have time to develop their own financial plans," says Stuart Bernau, executive director at Nationwide.

The hesitation is well founded.

To recap, there are two types of equity release scheme: a lifetime mortgage that is regulated by the Financial Services Authority (FSA), and a home reversion plan that isn't, at least. until next year

With the former, your home is used as security for a loan that is repaid (with high interest rolled up and added) on the property's sale when you die or move into long-term care.

With the latter, you sell a slice of your home to an investment company in exchange for a cash sum. When the property is sold, the proceeds are split between that company and your heirs.

But in May last year, a "mystery shopping" exercise by the FSA found that more than 70 per cent of advisers weren't gathering enough information about their customers before offering advice on equity release. Many, the FSA said, weren't properly explaining risks such as high interest rates, mounting debts and negative equity.

Meanwhile, equity release can affect your entitlements to state benefits, and will inevitably reduce the estate left to children.

Despite the criticism, figures reveal growing demand. In the first six months of this year, the number of new equity release mortgages rose by 2 per cent on the same period last year - from 10,877 to 11,130, says the Council of Mortgage Lenders.

There are also signs that consumers are being offered a better deal.

"The market is still evolving," says Nick Gardner at broker Chase de Vere Mortgage Management. "Many schemes now offer far more sensible 'drawdown' facilities, which allow homeowners to take money out of their equity as they need it.

"This means they only pay interest on the cash they use and not on one big lump sum given at the outset - the bulk of which can sit unused for many years."

Many schemes also guarantee that a portion of the equity will be left to your heirs, or provide a "no negative equity" pledge.

Meanwhile, average interest rates on equity release products are now lower than the average mainstream standard variable rate, according to industry body Safe Home Income Plans.

To make ends meet, Patrick Maitland from Norfolk has taken out a £27,000 lifetime mortgage with Norwich Union.

"Things have eased tremendously," says the 72-year old, who has no family. "I decided there was no point sitting on all the money that had built up in my flat, when I'm struggling to live on a small pension."

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