Equity release: good or bad?

Q: Please can you provide some information on equity release, as I have heard both good and bad things about it. I would be very interested in a professional opinion on the subject.

A: Richard Morea is technical manager at London and Country

Equity release schemes are usually available as either a lifetime mortgage or a 'home reversion plan'.

Lifetime mortgages allow you to release part of your equity, which is repayable on death or the sale of the property, along with the rolled-up interest. The amount repayable depends on the initial sum borrowed and the number of years before the loan is repaid.

With a home reversion plan, you sell a percentage of your property to the equity release provider, at a discount to its current market value.

You can continue to live in your home rent-free, but on your death or the sale of the property, the provider reclaims its share in the property plus any growth in its value.

The benefit of this method is that you sell only a fixed percentage of your home, albeit at a discount.

Equity release is usually only available for borrowers aged 65 and over, although a few lenders will consider applicants from 55.

The schemes are most suited to those who are asset-rich and cash-poor, particularly if they have no children or other dependents to benefit from their estate on death.

Lifetime mortgages are considered more suitable for older borrowers as there is likely to be less interest rolled up before death or sale of the property, but of course there is no way of telling how long you will live, so the interest could still be significant.

Although a no-negative guarantee would ensure you never owe more than the value of your home, interest payments could eat up much, if not all, of the remaining equity.

If you are using the equity that is released to supplement your income, you need to check whether it might result in a reduction in your entitlement to some state benefits. Overall, much will depend on the options open to you and how acute your needs are.

If you are considering equity release you should always seek specialist advice, and ensure the provider is a member of SHIP (Safe Home Income Plans) – as a member, it will have to adhere to a code of practice.

The Consumer Financial Education Body's Money Made Clear documents provide a clear and unbiased source of information. Go to moneymadeclear.org.uk

More about