Growing fears over cash release deals

Controversial loans that allow elderly people to unlock the equity in their homes should be closely regulated to avoid a new mis-selling crisis, brokers and consumer groups are warning.

Their comments come as the Treasury decides whether the loans known as 'home reversion' schemes should be regulated by the Financial Services Authority (FSA). A great deal of consumers' cash is at stake: the market for equity release products rose by 69 per cent last year to £1 billion, according to the Council of Mortgage Lenders.

'It would be not only illogical but dangerous if these products weren't regulated,' says Janice Allen, spokeswoman for the National Consumer Council (NCC). 'Home reversions can lock people into a decision they may later regret.'

The Consumers' Associa tion is also worried. 'Few of the equity release products on offer provide good value for money and they are complex and inflexible,' says Teresa Fritz, principal researcher at Which?, the magazine of the Consumers' Association. 'They must be regulated without question. We also have grave concerns about some of the ways these products are marketed.'

Equity release is different from remortgaging. When you remortgage, you borrow a lump sum and repay monthly instalments of the mortgage interest and capital. When you have paid off the debt, the property is yours.

One type of equity release scheme, known as a lifetime mortgage, allows homeowners to borrow against the value of their property without having to move house. The interest rolls up until the owner dies or moves to long-term care, although the effect of compound interest can, over time, wipe out the equity in the property. These products will be regulated by the FSA from October.

The other type, known as home reversion plans, involve people selling all or part of their home in return for an income or lump sum and the right to live in the property until their death. At present they do not fall under the FSA's remit because technically, they are neither mortgages nor investment products.

Both forms of equity release are becoming popular among retired people who have a lot of equity in their homes but little money in their pension scheme.

Mike Boles, a director of Savills Private Finance, says equity release products are 'borrowing of last resort'. He says: 'Home reversion plans are a specialist product sold to a vulnerable group. If you get it wrong, you could end up handing over your home - it is a far more significant decision than a normal mortgage.'

One of the main objectives of campaigning groups such as the Consumers' Association is to avoid a repeat of the Home Income Plan scandal of the 1980s and 1990s. During that time, many people signed up for deals only to end up saddled with huge debts and negative equity after house prices fell.

'The products are marketed as an easy solution to the savings gap, without spelling out the downside,' says Teresa Fritz of the Consumers' Association. 'Once you have signed up you have reduced your options for the future. What happens if you need to move nearer to your family, or want to downsize into sheltered accommodation?

'It is immoral for lenders to start going on a selling spree of new equity release products when some of them have still not cleared up the original mess. At the moment our argument is that these products are just not fit for the purpose. They trap you into deals and the risks are not properly explained.'

National Debtline describes the rise of equity release as 'worrying' since the sector is currently unregulated. The market for all equity release products is expected to grow strongly over the next decade. Britain has an ageing population, and many people have a sizeable equity stake in their property.

With a home reversion plan, you sell all or part of your property to a finance company at a big discount. The discount can be 40 to 60 per cent, depending on your age.

'You have the right to live in the property until you die or go into care and then the company takes it or the part of it that you have given up,' says Ray Boulger, senior technical manager of mortgage broker Charcol. 'Say your house is worth £200,000 and you sell a 50 per cent share in it. The finance company might give you a £40,000 to £60,000 lump sum depending your age and state of health. It is a very expensive way of generating income.'

He says another option to consider is selling your existing house and downsizing to a smaller property or cheaper area to release capital instead. 'Home reversion plans generally offer relatively poor value unless you expect property prices to fall.'

Boles says: 'You are paying a premium to go into one of these schemes. You need to think about what you are trying to achieve by using equity release products. You could just sell your house, take some cash out and trade down to a home without a mortgage. People don't always consider this option because they are emotionally attached to their house.

'You could also consider an interest-only mortgage without taking out an endowment. Lenders will be happy to offer deals to you in your sixties, seventies or even eighties if you can demonstrate that you have adequate income to pay the monthly instalments. Interest payments will roll up and compound against the value of the property, and this debt will have to be repaid.'

Time to act

Tony Craven runs HIPS '97, a national support
group for people with failed home income plans
and equity release schemes. He bought a home
income plan in 1989 with the Newcastle building
society. He said: 'Even modern schemes are
starting to fail. It needs regulating. It is not a
question of if, but when, these plans should be
regulated.'