This follows from my previous blog.
Equity Release should be an answer to people’s prayers. Having saved all your working life to buy a house, you should have a nest egg if you need it later in life.
But unfortunately it is not that simple.
On the face of it, it should be easy to raise money against the equity in your house, and equity release companies will tell you that it is. You can have cash and stay in your home. Even better you have nothing to pay until you sell your home or die.
The trouble is that if it sounds too good to be true, it usually is. Most companies will only lend you a small percentage of the current value of your home – around 40% is the best you can get, because they rely on the remaining value to pay their fees and the cost of the loan. These are generally twice as high as a normal fixed rate mortgage. Currently 6.3% compared to 3.3%. The higher cost is to cover the fact that there are no repayments and the uncertainty of when and whether they will get their loan fully repaid.
The other big catch is the “early repayment charge”, which is triggered if you decide to sell your house – typically if you go into a care home. These charges can be very high, without any obvious justification.
Equity release acquired a bad name 20 or 30 years ago for miss-selling and little has been done to improve the situation since then. It still seems like an expensive option. Nonetheless, last year equity release lending reached a record high of £1.4 billion according to the Equity Release Council, up 29% from 2013.
Many older people who use equity release are asset rich and income poor and if they need additional money, it may be their only option to raise cash. Sadly lenders seem to be taking advantage of this.
The equity release market is opening up rapidly with the number of new financial products nearly doubling in the last year. That should be good news for the consumer.
It could release billions of pounds for better care or it could be a new scandal in the making.