Equity release from pensioner poverty?
With savings and pension funds depleted by the recent economic turmoil, pensioners are looking for other ways to supplement their pension and many are using their house as a way of generating cash.
And as private pension schemes become less reliable, equity release may become an increasingly popular way of providing an income at retirement in the future.
But equity release schemes have been criticised by some consumer groups and have received a bad press in the past.
Does this mean they should be avoided, or are they an important tool for unlocking the value in your home?
Sarah Routledge investigates.
What is equity release?
Equity release is a way of getting cash from the value of your home. There are several different types, but they all work on the principle that you borrow cash against the value of your home, and the debt is repaid from the sale proceeds on your death.
Early equity release schemes have been criticised by many consumer groups, including Which? for being too expensive and leaving some people with unsustainable levels of debt.
But the market has moved on from early schemes that were inflexible and expensive. Both home reversion plans and lifetime mortgages, the main types of equity release, are now regulated by the Financial Services Authority (FSA).
However, the FSA and charities still recommend anyone thinking about taking out an equity release product should consider all the consequences - and get independent financial advice first.
If possible, you may want to first consider if you could unlock cash by selling your home and downsizing to somewhere cheaper. If this is not possible, or you are keen to remain in your home, then you need to look at which type of equity release scheme is suitable for you.
Home reversion
These plans allow you to sell your home or a share of it to a reversion company for a lump sum, a monthly income or a combination of both.
The company then gets a share of the proceeds when the home is sold on your death, so if you initially sold 25 per cent, the company will take 25 per cent of the proceeds.
If your home rises in value, this means the company could end up taking a much higher payment than was originally borrowed. But equally, if your home falls in value, the loan company could lose out.
In addition, the company will only pay you a percentage of the current market value of your home, as you will be effectively borrowing money without paying interest until the house is sold. So, if you sell your entire home do not expect to get more than 50 per cent of its value - this will be lower if you are younger.
Lifetime mortgages
These mortgages allow you to borrow a fixed amount against your home. The interest on the loan, plus the capital, is repaid from the proceeds of the house sale after you die.
Lifetime mortgages are vastly more popular than home reversion, with 95 per cent opting for this type of product.
"This is mainly because lifetime mortgages are much more flexible," says Dean Mirfin, business development director for Key Retirement Solutions.
"Ultimately, home reversion involves a sale of the share of your home and psychologically, that's something some people won't even consider."
The advantage of this type of product is the initial lump sum can be higher - potentially up to 50 per cent of the value of your property - but the interest payments can build up quickly and tend to be quite high, around six to seven per cent. This means there is no way of knowing how much it will eventually cost.
However, all lenders who are members of Ship - the trade body for providers of regulated equity release products - have a 'no negative equity guarantee' which means there will be debt to pay off if your mortgage ends up worth more than the property.
"Now with lifetime mortgages you can build in the same guarantees as home reversion, so if inheritance is important, you can build it in," adds Mr Mirfin.
What are the risks?
Consumer group Which? believes anyone thinking about borrowing on their home should consider the risks carefully.
"Equity release is a high risk product and should be an option of last resort," says Teresa Fritz, Which? spokesperson.
"You should look at the other alternatives first. The risk is particulalry high with 'roll-up' loans [where interest payments are 'rolled' into the capital] - you could find out that your equity has reduced significantly."
Although you may want to stay in your home for the rest of your life, you may feel different in a few years time. And releasing equity may make it difficult to sell up at a later stage, Which? warns.
People often do not realise that while they may be happy not leaving something when they die, they may actually need the money while they are alive, Ms Fritz warns.
"So if you do it when you are 60, will there be enough left when you are 80?"
An equity release plan can also affect your entitlement to state benefits - if you receive more than £90 per week in addition to the state pension, you could lose any pension credit you were receiving, and this also applies to health and council tax benefits too.
Although equity release as a solution to financial difficulties has its place, the government needs to rethink how this need is addressed, Which? believes.
"There is a real need for a not-for-profit, national equity release scheme, particularly for vulnerable people looking to supplement their income.
"We need to have a low-cost scheme that just covers its costs, something similar to what some local authorities already do - allowing people to take out a low-interest loan to allow people to go into care.
"So from Which?'s point of view, we would welcome government backing [for equity release] but not as the market stands at the moment."
However, Andrea Rozario, director general of Safe Home Income Plans (Ship), responds: "Equity release is most definitely not an option of last resort but a logical consideration for those considering how to fund their retirement.
"It offers a guarantee that older people can stay in the homes they know and love, with no monthly rent and a no negative equity guarantee.
"All SHIP providers recommend that those thinking about equity release seek qualified advice and involve their families in any decision making," Ms Rozario adds.
Dean Mirfin agrees. "The product is phenomenally more flexible than it used to be," he says.
He cites the popular drawdown facility as one way equity release has addressed concerns - customers can agree a loan but only take as much as they need at first, leaving the rest in reserve in case they need it in the future.
"If you think you may want to repay the loan early, we ask you at the start if you want that flexibility - there are plans available with no redemption penalty if you pay it off early, although you will be paying a higher interest rate.
"Some are on a sliding scale, so the longer you have it, the less the penalty will be."
Mr Mirfin also believes people should not be put off by falling property prices - most people can still borrow the amount they need, and if property prices start to rise again, they can always borrow more later.
Another concern many have is what would happen if their lender goes bust.
"But the answer is nothing," says Mr Mirfin, "Another company will take over the loan, but the terms of your mortgage are fixed so nothing can change."
If you have just retired, it may be better to wait a little longer as the older you are, the better deal you are likely to get. In addition, although it must be your decision, it would be a good idea to discuss your plans with your children, or anyone else who may be expecting to inherit from you.
The important point to remember if you are considering equity release is to get independent, specialist advice, Mr Mirfin says. "We recommend customers to also look into downsizing, while in some cases a normal mortgage is more suitable," he explains.
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