Boost for equity release plans as elderly cash in

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The Independent Online

Sales of equity release schemes rose by more than 38 per cent during the first quarter of 2005, as elderly homeowners rushed to cash in on recent highs in the UK housing market.

Sales of equity release schemes rose by more than 38 per cent during the first quarter of 2005, as elderly homeowners rushed to cash in on recent highs in the UK housing market.

According to figures from Key Retirement Solutions (KRS), the UK's largest equity release financial advisory group, total industry sales were £376m over the three months to 31 March, up 38.8 per cent on the same quarter last year, although down slightly on the final quarter of 2004.

Sales of lifetime mortgages were £235m, down 5 per cent on the previous quarter. However, sales of home reversion plans rose slightly to £141m.

Equity release plans have soared in popularity, as elderly homeowners have made the most of sharp house price rises in the UK. Over the last five years, sales have increased by more than two and a half times, inspiring several major financial services companies, including the likes of Standard Life and Prudential, to enter the market.

KRS said the fastest growth in equity release sales is in the south of England, with Brighton topping the league table for the highest number of deals done in the first quarter. Sheffield, Birmingham, Leicester and Chester also featured prominently in the tables.

Dean Mirfin, the business development director for KRS, said: "These figures provide further confirmation of the strength of demand for equity release, which has now been at record levels since July last year. The fact that equity release activity is highest in cities as widespread as Brighton and Sheffield, shows that the popularity of the product is not confined geographically, but has wide appeal to equity rich 'Middle Englanders' across the nation."

He added: "We expect business growth to continue strongly in 2005, as further new providers enter the market, and an increasing number of people seek to supplement their retirement income."

Sales of home reversion plans have remained poor compared with lifetime mortgages, principally due to the difference in regulations. Although lifetime mortgages are regulated by the Financial Services Authority, reversion plans are still unregulated, causing most major providers to avoid the market.

Last year, the Treasury bowed to industry pressure and agreed to level the playing field by regulating reversion plans. However, the new rules are not set to come into force for two years.

Meanwhile, the surge in equity release sales has prompted the FSA to step up its monitoring of equity release marketing literature, due to concerns that the policies could be being mis-sold. Unwitting customers are often advised to draw down more than they need, and then told to reinvest some of the proceeds, giving their advisers the chance to double up on commission.

Pitfalls abound in using your house as your pension

There are two types of equity release plans. Lifetime mortgages allow homeowners to draw down up to 40 per cent of the value of their home, with interest rolled up until the property is sold (usually on death).

Home reversion plans see homeowners sell all or part of their property while retaining the right to live in it. The property is sold in the event of death, leaving the provider to claim their stake.

If house prices rise, the customer loses out on any growth in the share of the property which they have sold. However the customer knows exactly what, if anything, their estate will be left with when they die.

Interest on lifetime mortgages rolls up, so the eventual amount payable depends on how long the customer lives. Although all equity release plans have "no negative equity guarantees" (in case the amount owed exceeds the property's value), customers' equity can be eaten up by interest charges if house prices fall, or if they live a long time.