How safe is equity release?

By DAN HYDE
Updated: 13:11 EST, 30 March 2010

Early scare stories have coloured many people's minds against equity release but what is the truth on some common fears? We quiz an industry expert.

Help at home: Unlocking wealth from your home is a useful option for some

Ever since a disastrous period for early unregulated schemes in the late 1980s and early 1990s, equity release has suffered from suspicion and distrust among homeowners.

Many of the older generation have been scared away as a result of terrifying debt problems suffered by equity release customers in the product's early, experimental days.

Things have changed since then and now the two most common types of equity release - lifetime mortgages and home reversion schemes - are regulated by the Financial Services Authority.

For some, a 'lifetime mortgage' or 'home reversion' scheme can help fund their retirement by allowing homeowners to unlock value stored in their property.

And as our population ages and comes face-to-face with gaping pension gaps, some politicians have called on the equity release market to help carry Britain's elderly through their old age.

Anyone thinking of using the schemes should be made acutely aware that they risk giving up a substantial amount of equity in return for a small amount of cash. With a lifetime mortgage debt rolls up over time and is likely to far outweigh the sum they receive and with a home reversion they will lose a substantial chunk of their home's equity.

Read our guide to learn more about the advantages and pitfalls of the schemes, and to judge whether equity release is right for you.

›› Your guide to equity release

In terms of safety, though, the equity release industry has changed significantly since the hit-and-miss days of the late 80s and early 90s.

One crucial difference and major player in making sure that everything is done fairly has been the presence of an organisation that oversees the industry, Safe Home Income Plans (Ship).

Ship, the self-regulation equity release industry body, was launched in 1991 and now acts to protect consumers by ensuring its equity release providers maintain good practice and abide by its Code of Conduct.

So while, equity release may or may not be right for you financially, dealing with a Ship provider means it should be safe. To find out just how safe equity release is, we quizzed Ship chief executive Andrea Rozario on eight of the myths that have been responsible for scaring off homeowners over the years:

MYTH 1. 'I'll lose my home'

Andrea Rozario, chief executive of Ship says: 'The number one guarantee of the Ship Code of Conduct is that equity release customers will be allowed to remain in their property for life, or until they move into long term care, provided that the property remains their main residence.

'With a home reversion plan the customer is able to sell all or a percentage of their property with the right to remain in it, rent free, or for a small nominal payment, for the rest of their life, or until they move into long term care.

MYTH 2. 'My children will be lumbered with paying off the loan'

AR: 'All SHIP members provide a 'no negative equity guarantee', which means regardless of the value of the home or how long the customer lives, the loan plus interest will never be a debt for their families.

However taking out an equity release plan will leave the customer's family with a reduced, or possibly no inheritance when the planholder dies. The customer and their family need to feel comfortable with this possible outcome, which is why SHIP encourages a customer's family to be involved with the decision to take out an equity release plan and why SHIP insists the customers always take professional financial advice and use their own legal adviser.'

MYTH 3. 'I won't be able to use my house as a form of inheritance for my children'

AR: 'Recent research shows that the baby-boomer generations would actually rather their parents enjoy their retirement than worry about passing on property and money to children.

'Research carried out by Key Retirement Solutions found that children are increasingly becoming involved in the equity release advice process, with 90% of clients involving their children before taking out a plan*.

'This support suggests that children would actually rather their parents enjoy their retirement than worry about passing on property and money to children.

'The money released from taking out an equity release plan might be used to benefit younger family members, by getting them on the property ladder, or paying for school fees.'

MYTH 4. 'Equity Release isn't safe or regulated'

AR: 'Equity release advice and lending is regulated by the Financial Services Authority (FSA). In addition SHIP members provide additional safeguards and protections

The Code stipulates that a customer must be given independent legal advice, and must also take professional financial advice.

'This means that all of the benefits and limitations of the product will be explained, together with any obligations that they might be under.

'The Code stipulates that a customer must be given independent legal advice, transparently clear documentation and advice about the other options open to them, such as downsizing and any possible impact on benefits.'

MYTH 5. 'I won't be able to move house'

AR: 'SHIP providers guarantee that customers have the right to move their plan to another suitable property without any financial penalty.'

Solution: Equity release can help pensioners stay in their homes

MYTH 6. 'I'll get into debt'

AR: 'If a customer has taken a home reversion plan there is no debt as part or all of the home is sold in return for a payment and the right of the customer to live in their home until they either die or move into long term care. When this happens their home is sold and if originally only part of the house was used for a home reversion, anything leftover would go to their beneficiaries.

'With the lifetime mortgage plans currently available from SHIP members, the customer raises a mortgage but makes no monthly payments, and the interest rolls up. The interest rate is fixed and SHIP members offer a 'no negative equity guarantee'. With this a lender promises that the customer and their beneficiaries will never have to pay back more than the value of their home – even if the debt has become larger than this.'

This is Money note: Of course, however, you describe these, both a promise of part of your home and a sum set against it rolling up over time are a form of debt. Make sure you release the full potential cost of equity release and if taking a lifetime mortgage find out how drawdown can cut debt over time.'

MYTH 7. 'Equity Release is only for low income households'

AR: 'There is no longer just one 'type' of equity release customer, with the needs and circumstances of those turning to equity release products becoming more diverse. Customers and intermediaries are looking at ways in which they can use property equity to fund care, tax and estate planning, or enhance their lifestyle.

MYTH 8. 'Equity Release is the same as sale and rent back'

AR: 'Equity release is not the same as sale-and-rent-back (SARB). The main difference is no security of tenure and a requirement to pay a full market rent with a SARB. A customer may be able to release more equity from a SARB, but this is because they are paying monthly rent.

'Full regulation by the FSA is due for SARB by June of this year, and the aim is to ensure the customer has security of tenure for up to 5 years. With lifetime mortgages and home reversion plans the customer has security of tenure until they either die or move into long term care and they do not make monthly payments, thereby increasing their monthly disposable income.'