The risk is reduced in tapping your home for income

New rules will help pensioners hoping to free the cash tied up in their bricks and mortar
Click to follow
The Independent Online

A vital piece of legislation is about to offer new protection to the growing number of "cash-poor, property-rich" pensioners who tap into the value locked up in their home to supplement small retirement incomes.

"Equity release" schemes are marketed by their providers as a financial lifeline in old age. Many, however, have been unregulated, offering no compensation to buyers in the case of any mis-selling by financial advisers or providers. But legislation that comes into force next month will, critics hope, make this route safer.

"[Equity release] is a complex and expensive product, so it is vital consumers make the right choice," stresses a spokesman for the National Consumer Council (NCC), one of a number of consumer bodies with strong reservations about this market.

So far, the problem has turned on the two different types of equity release.

With one of these, the more popular "lifetime mortgage", homeowners take out a secured loan on their property - usually of no more than 40 per cent of its value. The interest charged is then rolled up and repaid with the capital when the homeowner dies, or is taken into care, and the house is sold. These mortgages account for 95 per cent of the market, and have been regulated by the Financial Services Authority (FSA) since October 2004.

The second type, home reversion plans, do not work like loans but are, technically, sale and lease agreements. Part or all of your property is sold to a provider for a cash lump sum - usually at a massive discount - although you keep the right to live there. At death, its sale reimburses the lender and leaves the rest of the cash for any heirs.

These schemes hadn't previously been under the FSA's aegis but will be from 6 April - a change that is expected to make a big difference. "[Having both products regulated] will finally provide a level playing field for product providers and make matters less confusing for customers, which should build confidence in the market," says a spokes- man for the Council of Mortgage Lenders (CML).

Home reversion had been excluded from regulation because it falls under the category of property sales, rather than loans. But the plans have triggered concerns about potential mis-selling, for example by unscrupulous salesmen who offer them instead of lifetime mortgages to avoid the extra burden of regulation. Also, given that the customers tend to be elderly and usually in financial need, they may have been particularly vulnerable to bad advice.

The regulation of reversion plans will give borrowers greater recourse to compensation. They will be able to turn to the Financial Ombudsman Service if they feel they have been mis-sold a product, and claim up to £100,000.

But, for all the layers of protection, the equity release sector - worth well over £1bn a year, according to the CML - continues to hold pitfalls for consumers.

Take lifetime mortgages, where the roll-up interest charges can amount to a hefty sum that runs the risk of leaving heirs with little from an estate.

For example, if a 60-year-old borrowed a £40,000 lump sum with a typical lifetime mortgage at a rate of 6.5 per cent, the debt would more than triple to £140,945 by the time they reached 80. Relying on rising house prices to ease this burden is a gamble.

Reversion schemes have also been criticised as poor value for money. Homeowners are usually given a cash sum worth just 30 to 60 per cent of the portion of the home they're selling.

As these plans can be difficult to understand, it is important homeowners know what they are agreeing to. Once they sign, they are locked in.

Safe Home Income Plans (Ship), an equity release trade body, has worked hard to achieve respectability for the sector since it was set up in the 1990s. It has a voluntary code of practice but providers can choose whether to sign up or not - and many haven't; it welcomes the extra regulation.

"The guarantees offered by Ship members - such as right of tenure for life, a 'no-negative equity' guarantee, the right to move and independent legal advice - will continue to guide people to quality products," says Jon King of Ship.

If you are thinking of equity release, research all other options first, such as downsizing or switching any spare cash savings to income-producing funds.

"Just because regulation has come in does not mean these plans are suitable [for everyone]," says Philippa Gee of independent financial adviser Torquil Clark.

"Sit down as a family and talk about not just the issues today but in five or 10 years' time, when you might need to pay for care. Equity release is easy to get into but hard to get out of."

'The children can manage'

Maurice and Patricia Green, both 67, cleared their mortgage and went to New York for a week after taking out a Norwich Union reversion plan.

The retired couple decided to release £23,000 of equity from their £90,000 three-bed home in Manchester after seeing an ad by the insurer.

"We had been thinking about it as we had never managed to get the mortgage paid off and didn't want this round our necks in retirement," says Maurice, a retired long-distance lorry driver. "But neither did we want to move to a smaller house. Why struggle when you don't have to?"

During several meetings, Norwich Union explained that the product was unregulated. But this didn't worry the couple as "[the insurer is] a well-known and trusted name", says Maurice.

Selling off a portion of their house and reducing their three children's inheritance is not a concern for the couple.

"We gave them a bit of the money from the plan and they can look after themselves," adds Maurice.