So is equity release really that bad?

At a time of overstretched pensions and low interest rates, it is hardly surprising that many older homeowners are planning to cash in some of the equity in their homes to make their golden years more comfortable. It is reckoned that Britain's over-65s are sitting on £460bn worth of bricks and mortar, so more's the pity that equity release - the principal mechanism for unlocking that cash - consistently receives such a bad press.

A recent report by Which? (formerly the Consumers' Association) called such schemes an 'option of last resort'. 'Equity release should come with a warning,' it pronounced. 'They are very expensive and can leave you with little or no equity in your home if you keep one for 20 or 25 years.'

Nevertheless, it is unlikely that demand for equity release is going to dip over coming years. According to the Council of Mortgage Lenders, some 30,000 households are preparing to take the plunge this year alone. 'Our kids have got more money than us. Why shouldn't we use the money from our homes to enjoy ourselves?' one pensioner was quoted in a recent report by the Joseph Rowntree Foundation on attitudes towards inheritance.

So why are the critics being such kill-joys? 'Most people spend their whole lives paying their mortgages off and then when they finally get to the stage where they have, do they really want to then get another mortgage for the rest of their lives?' says Teresa Fritz, principal researcher at Which?. Is it worth it for the sake of a new kitchen or to buy a new car? she asks. 'People tend to think their houses are worth a lot of money so a loan of £20,000 isn't going to make much of a dent. They don't understand that that loan will double in 10 years and triple a few years after that.'

So what other solutions are there for the elderly, 'asset-rich, cash-poor' generation? Age Concern recommends that homeowners should bear in mind that they could downsize and may be entitled to receive local authority grants for property repairs. They should also check out whether they are receiving all they can from state benefits.

Age Concern offers its own equity release scheme with Northern Rock. So what does it make of Which?'s downbeat assessment? 'They're saying the same things that we are saying,' says Sally West, policy manager at Age Concern. 'You should look at all the potential problems. What if you might want to move, because losing some of your equity means limiting your options? People need to think carefully not only about what the situation is now, but also in 10 or 15 years' time.'

So what does the industry make of the charge? 'We are dealing with a cultural shift about what is and isn't acceptable,' says Simon Little, equity release product manager at GE Life. He believes that the 'last option' tag is a misconception of a diverse market which breaks down into 'the needy, the life-stylers and the more sophisticated high-end people with concerns about inheritance tax planning'.

'It's misleading to badge people in a simplistic way,' says Little. 'Clearly, people at the needy end of the market should have sought financial advice and gone through their options.'

The equity release brand has been tarnished since the Eighties, when homeowners faced double-digit interest rates combined with a collapse in the property market that left many with roll-up loans in negative equity.

Concerns about the way the products are marketed persist. Which? was particularly incensed about one advert by Norwich Union which suggested that it was a good way of raising money for a trip to New York or 'something for the family'. The minimum loan was £15,000 and the group reckons that, after 10 years, you would owe a total of £28,000 in interest.

It was not until late 2004 that equity release schemes were regulated at all, when lifetime mortgages came under the Financial Services Authority's watchful eye. Home reversions remain unregulated, but they are expected to come under the FSA's remit in 2007. The industry has taken steps to police itself through the Safe Home Income Plans (Ship) scheme, which provides a code of practice for its 18 members (who include GE Life and Norwich Union). Ship providers offer a 'no negative equity guarantee', so that even if the future value of your home is less than the amount you owe, you or your estate can never be left with the debt. Members offer further protection in the condition that legal work will always be carried out by a solicitor of your choice.

'You should go into equity release bearing in mind that it does exactly what it says,' advises Tish Hanifan, a barrister who specialises in advice for the elderly. 'It is a mechanism by which you can have access to funds that you otherwise would not have access to at a time that you most need it.'

Hanifan points out that there is a 'personal balance' between the benefits of having your money now and reducing what might be available later to you or your beneficiaries. 'It is not a panacea, nor is it the devil incarnate,' she adds.

'If somebody like me can get caught, God help others'

'I haven't been able to sleep thinking about it,' claims Ann Haig McVitty. Three years ago Mrs McVitty, 76, signed off on an equity release scheme to borrow £50,000 from Legal & General and immediately regretted it. She and her husband, who is 10 years older, wanted the money for a new car and to redecorate the house.

'It's something that eats away at me,' she says. 'When I look out at the garden I think of the compound interest building up, making it impossible to get out of the mess.'

A lawyer and independent financial adviser by background, she reckons that at 7.3 per cent interest, their debt will double in 10 years. 'If somebody like me can be caught out like this, then God help the rest of the community,' she says. She also worries about what will happen to her if her husband dies before her. 'I am locked into this scheme so I can't take advantage of any of the others with better interest rates, where you can draw on them like a loan as opposed to taking it all in one sum with interest clocking up from day one,' she says. 'It has put a kibosh on my ability to downsize or pay to go into sheltered accommodation.'

'It meant we could do all we wanted'

'It's made a tremendous difference in our lives,' reckons Olive Bedwell of Southwick, West Sussex. 'It has meant that we could do everything we wanted to in our home as well as helping our daughter out.'

Olive and husband Eric, both 78, released £42,726 from their £185,000 home four years ago through an Orchard cash reversion plan. They have used the money to help pay for a sun lounge and a new garage, to take a holiday and to help their daughter buy her own dream home.

'My husband was in the police force and when he retired that didn't leave much money behind for us,' she says. With a reversion scheme, homeowners sell a proportion of their property to the reversion company in return for a lump sum. Mrs Bedwell describes the scheme as 'straightforward'.

Did the couple talk to their two children, now 53 and 45, about cashing a significant share of their wealth? 'The kids have their own properties, and they said: "Don't worry, you take it out and do what you want with it",' she says.