EQUITY RELEASE PLANS SLAMMED BY WHICH?

[28 February 2006, which?]: House price prospects might be less bright than previously thought.

National Homebuyers offer a service that allows homeowners to release the equity in their properties and remain living in their home as a tenant. "Sell and Rent Back" is easy to understand and does not lock sellers into complex financial plans. As Equity Release schemes are criticised, more and more people are using the National Homebuyers service to unlock the cash tied-up in their homes, while remaining as  a tenant.

[BBC, January 30th 2006]: Equity release schemes, which allow people to unlock money tied up in their property, have been criticised by the Which? consumer group.

The organisation said the policies were expensive, inflexible and risky. The schemes are a form of mortgage which typically allow elderly home owners to cash in on the value of their homes but repay the debt on death.

However, insurance firm Norwich Union criticised the report, saying Which? had misrepresented the industry.

In the latest edition of its magazine, Which? says equity release schemes can be risky - a view that has been echoed by the Financial Services Authority (FSA) in the past.  "The majority of the products available just aren't doing the job fairly, they are not giving value for money and they are not explaining the risk properly upfront," said Which's principal researcher, Theresa Fritz.

The magazine says the main problem for borrowers - or for those who inherit their homes when they die - is that equity release schemes can lead to a large chunk of the value of a home being swallowed up to repay the loan, plus interest.

It calculates that borrowing £80,000 against a property worth £350,000 could see a repayment of £256,570 being demanded after 20 years.

And it singles out the Norwich Union insurance company for particular criticism. It currently has the largest share of the market for selling these schemes.

Daren Carter, sales and marketing director at Norwich Union Personal Finance, hit back, saying its advertising was clear.
"We are very disappointed with this (report) and think it is a misrepresentation of the industry," Mr Carter said.

"We have been involved in the market since 1998 and when we first entered it there was no regulation, although we always treated the product as if it was regulated.

"We were also at the forefront of lobbying to get the products regulated."

TYPES OF EQUITY RELEASE SCHEME AVAILABLE

Home reversion: A company buys a share of the home. On the sale of the property, the company takes its cut of the profits.

Home income plan: The provider gives you a mortgage on your home, which you use to buy a lifetime income, or annuity. Interest payments are taken from this income and the original loan amount is repaid from the final sale of property.

Interest-only mortgage: A lump sum loan against the value of your home is repaid out of the proceeds of the sale. Interest on the mortgage is paid monthly

Lifetime mortgage: You borrow a lump sum and/or monthly income and pay everything back on the sale of the property, including the cumulative interest on the loan amount.