Equity release is becoming increasingly popular, with growing numbers of people unlocking the wealth tied up in their bricks and mortar.
But while these products are properly regulated and the widespread mis-selling of a few years ago seems to be a thing of the past, homeowners are being warned to be wary before signing up for equity-release schemes.
Industry group the Equity Release Council recently forecast that the market is on course to hit £3bn this year. But financial-information service Defaqto points out that equity release can be a complex product, and people need to think carefully before signing up.
There are two kinds of equity-release products: home reversion and lifetime mortgages.
A home-reversion plan allows you to sell all or part of your property to a provider in return for a cash lump sum or regular payments. A lifetime mortgage is a plan where the owner takes out a mortgage but still owns the property; when the owner dies or goes into a care home, the home is sold and the debt is repaid.
Almost all equity release products sold today are lifetime mortgages.
The experts at Defaqto said the increasing popularity of equity release was down to a combination of a rise in the pension age, increased life expectancy and poorer incomes from pensions. Of those people who take out equity release, most use the money to pay off existing debts, although some use it as spending money or for topping up their pension income.
You can access equity release only through an adviser, who will help you choose the right product and explain the Ts & Cs before you sign up, but even with this advice there are a number of things you need to consider.
The no-negative-equity guarantee means that if there isn’t enough money left when the property has been sold, you won’t have to pay any outstanding amount. In other words, you cannot end up owing more than the value of your home
But the amount you can borrow will depend on factors such as your age, any medical conditions and the value of your property. And you will need to decide if you want to access the money in several payments or via a single lump sum.
Meanwhile, bear in mind that if later you sell your home and pay off the lifetime mortgage, you will be charged an early-redemption penalty.
“These plans can be complicated to understand and it’s important that consumers are able to see both the benefits and the potential issues of the plan that they are thinking about entering into,” said Brian Brown, of Defaqto.
“Because these can be taken out only through an adviser, they will have these explained to them, but it’s important that they know what they are buying and the questions they should ask.
“Often people are thinking about the short-term benefit of getting their hands on their cash that they can use towards home improvements or just generally improving their retirement lifestyle. But consumers need to look beyond this and understand the costs involved and how easy or not it is to be able to get out of the policy further down the line if their situation changes again.”