Is equity release a good idea?

Q My partner has an aunt who is 74. She has an outstanding mortgage with a leading bank after having remortgaged regularly. She is now worried that she will eventually lose her house, and has sought advice from an independent financial adviser who recommends a remortage-type of equity scheme with a company that will take on the outstanding loan.

She has specified that she wants maximum access to capital and has been recommended only one product. The house is valued at ?300,000 and the capital release will be ?117,000. However, she only needs about ?40,000 at the moment so wants to put the remaining ?70,000 into some form of investment.

While we think that the principle of equity release is excellent and will deal with the fact that she still has an outstanding mortgage, we are concerned that she is borrowing money at 6.7%. Her financial adviser feels that her investments will pay out more than 7% a year, but isn't the only way she could get this rate of return by taking risks with her capital? The mortgage product will not allow a gradual drawdown of capital without incurring penalties. Should she look for another product? Also should she really be borrowing ?70,000 and trying to invest to get a return of more than 6.7% or is this unrealistic?

GVP

A I gather from your question that you fully understand, and are happy with, how the equity release scheme works. Personally I would not be. The company is effectively acquiring your aunt's property when she dies at a heavily discounted price (nearly two thirds below the current value) and is charging her a high rate of interest for the privilege.

Presumably the interest will be accumulated for deduction against the value of her property when she dies. Compound interest multiplies at a frightening rate and the whole value of her property could be wiped out. However it is her life. She will be able to live more comfortably and it is her heirs who could lose out in a big way. I would seriously question the financial adviser's claim that it will be easy to ensure a return of over 7%, especially if she is a taxpayer. No deposit accounts, allowing easy access to capital, are paying anywhere near that amount and even risky investments with restricted access would be lucky to exceed over 7% on a regular basis.