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Last Updated: Thursday, 5 January 2006, 11:23 GMT
Equity release plans criticised
Suburban house
Equity release schemes have become very popular in the past 10 years.
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 mis-represented the industry.

Risky borrowing?

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.

'Clear advertising'

Daren Carter, sales and marketing director at Norwich Union Personal Finance, hit back, saying its advertising was clear.

Types of equity release scheme
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.

"We are very disappointed with this (report) and think it is a mis-representation 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."

Ray Boulger, of mortgage brokers John Charcol, suggested the criticisms by Which? were irresponsible.

"They have a responsibility to be balanced," he said. "They could equally have said the schemes can be good value, flexible and enhance your lifestyle in retirement."

A couple explain why they wanted an equity release loan

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