British people over 50 are estimated to have more than £750 million equity in their homes. That is, the extent to which their market value exceeds any debts attached to them. Equity release schemes enable homeowners to unlock some of the wealth they hold in bricks and mortar to spend on whatever they wish. Equity release allows you to get significant lump sums by either selling a share in your home or taking out a specialised mortgage. The lump sum can then be used to supplement income. If an annuity is purchased, a guaranteed income will be secured. Schemes that entail borrowing against the property, usually only require repayment of capital and interest when the borrower dies or moves into institutional accommodation

Who’s doing it?

Figures from Just Retirement, which has about a third of the equity release mortgage market, show that its customers now represent a broad swathe of Britain, rather than equity release being a perk for the rich.

“Where we previously saw a focus on the most affluent social group, this has now been replaced by a profile that is far more in line with UK norms,” said Stephen Lowe, a Just Retirement director. “Equity release is being used as a way to help customers top up their retirement income in response to falling annuity rates and increasing costs of living.”

The age at which people are taking out the mortgages is also falling, with the average age of 70 masking a large uptake at the age of 61.

Figures from the Equity Release Council (ERC), show that three quarters of home owners are planning to use their property as part of their financial planning for later life, because they have not saved enough for retirement.

Times have changed

Equity release got a bad rep in the 1980s earlier versions of these schemes ended in disaster when interest rates went up and house prices and share prices fell in the early Nineties. Thousands of pensioners who had borrowed against their homes to invest in broker bonds that delivered disappointing results found themselves plunged into negative equity. They had debts greater than the value of the properties to which they were secured

But since then the market has moved on greatly and schemes approved by the provider’s association the ERC come with plenty of guarantees. In addition, the statutory watchdog the Financial Services Authority (FSA) has brought home income plans within the scope of its regulation in a bid to drive out bad advice and protect consumers

How does equity release work?

An equity release provider will provide you with either a lump sum or an income in exchange for part of the value of your home

This is done by using a type of mortgage, or by selling that portion of your home on the condition that you can continue to live there as long as you wish

Read on to find out more about these different types of equity release

Types of equity release scheme

There are two types of equity release plan: home reversion schemes and lifetime mortgages, or cash release schemes as they are sometimes known

With a home reversion scheme you sell your home, or a percentage of your home, to a plan provider. You can remain in your house rent-free until the last borrower, in the case of a couple, dies or is transferred into long-term care. When the property is sold the provider reclaims their percentage with the rest going to the heirs of your estate

With a lifetime mortgage, on the other hand, you take out a mortgage on your property and may use the money as you wish. As the interest is accumulated over the life of the mortgage there are no monthly repayments to be made. SHIP-approved plans come with a ‘no negative equity’ guarantee so you will never have to pay back more than the value of your home. This is very important because, with this type of plan, the longer you live the larger the amount of interest that will be due

The loan can be taken as a lump sum, with interest charged on the full amount from the outset, or flexible plans allow for sums to be drawn down at intervals and interest is charged only on the amounts drawn down

Other guarantees with lenders who are members of SHIP include the right to move house and transfer the equity release plan to the new property

Are there any other forms of equity release?

It is possible to cut out the middleman and set up your own equity release arrangement

A few enterprising individuals have tried their own version of the French viager system, by selling their home privately at a discount in exchange for lifelong tenancy rights

This may sometimes offer better value but isn’t easy and requires in-depth legal and financial advice

Tread carefully

Even with the newer, safer, equity release schemes, there are few financial decisions more important than those which affect the roof over your head, especially if you’re already retired. NMTBP have 10 tips you should bear in mind if you’re considering equity release:

Compound interest is a cruel taskmaster

Equity release schemes typically charge double the interest of ordinary mortgages, and many people don’t realise how expensive they can be. As a rough rule of thumb, the debt doubles every 10 years: so if you borrowed £50,000 at 55, you will owe £100,000 at 65, £200,000 at 75 and £400,000 at 85

Lenders argue, with some reason, that they need to charge more for equity release schemes because they do not know when they will be paid back. But these schemes remain an expensive solution to a real problem for many older homeowners

So beware of taking out a plan too early. Taking one out in your fifties could be seen as reckless; taking them out in your seventies makes more sense than doing so in your sixties

Just Retirement figures show that, although the take-up of equity release was greatest when people hit 70, there was a sharp rise from the age of 59 onwards. They expect that the age profile will continue to fall, even though equity release mortgages are a particularly expensive product if you take them out early because the interest rolls up

Hand flipping wooden cubes for change wording” Panic ” to ” Calm”. Mindset is important for human development.

Don’t take unnecessary risks

Most of the major lenders subscribe to the ERC code of practice. This guarantees, among other important safeguards, that equity release borrowers can stay in their own home as long as they live. Don’t choose a lender who doesn’t provide this reassurance

Get independent professional advice

Given the amount of money involved in equity release and the potential for problems to arise, it’s well worth paying for your own solicitor to scrutinise the paperwork. Beware of any adviser or lender who offers to “look after all the legal documents for you”. Accepting that offer would mean the solicitor is acting as an agent of the adviser or lender, not the borrower

Avoid contracts you can’t understand

Insist on plain English explanations and remember that gobbledygook may conceal some nasty surprises

Take your time and refuse to be rushed

Remember the adage about acting in haste and repenting at leisure. If a salesman puts pressure on you to make a decision now, then your answer should always be “No, thanks”

Make sure it’s portable 

Some schemes can be inflexible if you need to move or have someone move into your property to care for you. If you need to redeem these schemes early, perhaps because you decide to trade down to a smaller property, there can be onerous penalties to pay, costing up to 25pc of the initial sum borrowed

The best home income plans allow you to move home without imposing any penalties or immediate repayment of all debts. Your circumstances and aspirations may change as you move through retirement and so it’s important to retain the flexibility to move home if you want to. For example, you may wish to move into sheltered accommodation

 Avoid schemes that can result in negative equity

Average life expectancy at state retirement age means the typical pensioner will live for another 20 years or so. Compounding can have dramatic effects when interest is allowed to accumulate on interest over such long periods. The best deals, including all ERC schemes, now provide a ‘no negative equity’ guarantee

You can’t spend the money twice

Debts run up against your home mean there will be less left for any family or friends to inherit. You don’t need permission from your children, or anybody else, but you might want to discuss your plans with those affected before you make your decision. On a brighter note, equity release can prove an effective way to avoid inheritance tax (IHT) liabilities because they enable homeowners to spend more of their wealth before they die

Beware ‘free advice’

Remember that many financial advisers rely on commission from insurance companies to make a living, rather than charging clients fees for their time, and so their recommendations may not always be in your best interests. Commission bias contributed to so many financial scandals in recent years that the City regulators are now committed to making independent financial advisers move toward charging clients fees for their time in the same way that solicitors and accountants operate

Don’t suffer in silence

If you’re unhappy with any financial adviser or financial services provider and they fail to give a satisfactory response to your complaints, report them to the FSA on 020 7066 1000 or 0845 606 1234. Or you can write to the regulator at 25 The North Colonnade, Canary Wharf, London E14 5HS, or contact them online at www.fsa.gov.uk

On the face of it, equity release appears to be the easy option for hard-up pensioners but it is not without its pitfalls. Take advice and understand how the debt rolls up – it’s a conversation that should involve a specialist financial adviser who adheres to the Equity Release Council’s conduct and guidelines – and, perhaps, your family too