Equity Release

Equity release schemes are not new, but with the continued rise of house prices, and pensions failing to provide the income once hoped for, the schemes are becoming more and more attractive.

Tapping into the value of your home to get some extra income or a lump sum means that you can stay in your house.

Jo Smith decided this is what

Jo: didn't want to move

she wanted to do after considering moving to a smaller home.

"I was thinking about downsizing but then I realised that I wanted to stay here."

Together with her son she's been weighing up the pros and cons of the various equity release schemes on offer but they had some worries about any hidden drawbacks with the schemes.

"It made me wonder if after signing up for the policy there may be some pitfalls further down the line." says Jo's son Doug.

Looking out for pitfalls

Choices

There are two main options for equity release.

The first is to take out a loan against the value of your house.

You then pay interest on that loan which is paid off when the house is sold.

The other option is to sell a share of the home.

This option gives you either a lump sum or a regular income.

There are pluses and minuses with each of these but the most obvious drawback of the sale option is that the owner will not gain if the value of the house increases.

Safe?

Many people were put off equity release schemes in the 1990's when house prices slumped and interest rates soared.

Home-owners ended up owing more than their properties were worth. Some people even lost their homes.

With interest rates now at record lows, the climate is arguably better, but there are still pitfalls to look out for.

Earning extra income from your property might affect any means-tested benefits that you're entitled to.

House prices in some areas are already starting to fall.

And most importantly, the home-income or equity release market is not regulated.

While the statutory regulation of mortgages is due to come about in October 2004, this will only cover 'life-time' mortgages i.e those that include a loan or mortgage element.

The Financial Services Authority will not have any jurisdiction over home-reversion schemes i.e. those that involve the full or partial sale of the property.

But the Treasury is reviewing the situation. The FSA argue that the the two schemes are "substituable and have a comparable risk."

Mervyn Kohler of Help the Aged argues that the biggest risk you take with these products is against your own life expectancy because you should always be able to afford the capital you've borrowed.

These schemes are better for people 75 and over.

Mervyn Kohler, Help the Aged

"These schemes are much better for people who are 75 rising 80," says Mervyn, "but if you're in your sixties you''ll end up with a poor valued scheme because you're going to live that much longer.

"The world is not risk-free so it's a question of balancing all these things but I would say that for quite a lot of people I think it's worth looking at."

Restrictions

It's worth noting however, than not everyone will be eligible to benefit from an equity release scheme.

Two Working Lunch viewers, Frank and Marilyn Hawke own a house in a retirement complex on a 99 year lease.

They wanted to start a flexible cash release plan with Norwich union but were refused because of special clauses in the leasehold agreement.

Exceptions for some retirment complexes

The lender considered the terms too onerous and feared that it might not be able to retrieve its money at the end of the plan.

Shop around

Many of the big lenders including Norwich Union and Northern Rock offer various types of Equity Release schemes and there are specialist companies too.

Before buying a scheme, make sure the provider is a a member of Ship - Safe Home Income Plans a specialist trade group.

And shop around to make sure you're getting the best product for you.