The pitfalls of equity release

September 22nd, 2008

The consumer organisation Which? has been looking into equity release schemes for the elderly of the type trailed so heavily on daytime TV.

Equity release allows retired homeowners to obtain money from their property without having to move out. People can be given a lump sum or regular payments in return for taking out a mortgage on their home, which does not have to be repaid until they die or sell their property. Interest is added to the amount owed until such time as a payment is made.

Alternatively, people who own their home outright can sell a portion of their property to a home reversion company. But Which? is warning that problems could arise if the borrower’s circumstances change.

In its conclusions, the consumer group says pensioners should only consider unlocking equity from their home as a last resort

Equity release schemes can be expensive, inflexible and leave people with little equity, according to Which? And any money people released from their property could also affect the level of means-tested benefits they are entitled to.

An individual who wanted to move into sheltered housing or a retirement home may have to pay back some of their loan earlier than expected. This could potentially leave them with too little equity to buy a new property, Which? added.

Equity release schemes approved by the Safe Home Income Plan (Ship) can be transferred to a new property. However, this does not always cover sheltered housing or retirement homes.

Which? is urging people to consider other options before turning to equity release. These include downsizing to a cheaper property, using their existing savings, or even borrowing money from family that could be paid back when their home is eventually sold.

The report says ‘equity release might seem like the solution for any pensioners struggling to make ends meet this winter since these schemes provide income while enabling you to stay in your own home.’

‘However, if your circumstances change you might not have enough money remaining to fund alternative accommodation, and money received through equity release may seriously alter the amount of benefits you are able to collect.’

I would echo the main recommendations of the Which? report. Anyone considering equity release should do so cautiously and only after exhausting other options. In all cases, independent professional advice should always be sought.

This entry was posted on Monday, September 22nd, 2008 at 5:26 am and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

The pitfalls of equity release

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