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Whose house is it anyway? The equity release empire strikes back

Leading economist Ros Altmann argued in this space yesterday that equity release providers charge too much to unlock wealth in bricks and mortar for older homeowners who are short of cash – but lenders claim her analysis is unfair.

For example, while some equity release schemes – also known as home income plans – charge more than 7pc per annum, or double conventional mortgage costs, it is now possible for homeowners aged over 75 to borrow at 5pc without having to pay any interest before they die or leave the property.

However, even at that lower rate of interest a debt will double in size in less than 15 years when interest is allowed to accumulate unpaid, as is the case with most equity release schemes. At 7pc, a debt will double in just over a decade.
Dr Altmann, a Governor of the London School of Economics, is critical of high costs. She said: “Most equity release schemes do not deliver good value.

“Older people have saved, through workplace pensions and other means, but the returns have often been disappointing.”

Nigel Waterson, chairman of the Equity Release Council (ERC), hit back: “Critics of equity release often claim it is more expensive than a ‘bog standard’ mortgage, yet in the same breath demand safeguards for the consumer. They miss the hugely important point that comprehensive safeguards – as ensured by dealing with a member of the ERC – come at a cost.

“Equity release is a practical way to release equity tied up in a property without having to move. Retaining the right of tenure is the primary appeal for many, as down-sizing involves considerable emotional and physical upheaval, as well as significant costs – so  it is understandably seen as a measure of last resort.”

The ERC’s code of practice includes a “no negative equity guarantee”, which means borrowers will never owe more than the value of their property. There is no such guarantee with conventional mortgages.

Equity release schemes offered by ERC members also guarantee borrowers the freedom to move to another property if they wish, without being subject to any financial penalty. That might prove very valuable if an older person or couple’s circumstances change – perhaps through frailty – and they need to move to a smaller property; for example, without a garden.

It is important to keep a close on the detail of different equity release schemes. For example, the 5pc deal mentioned above is a variable rate – so costs could rise – and it is offered by Holmesdale Building Society, which is not a member of the ERC. So risk averse borrowers might prefer slightly more for fixed rate schemes offered by ERC members – such as Just Retirement’s 5.74pc deal.

Mr Waterson added: “Every provider member of the ERC has to abide by our code of conduct, which ensures that customers will be provided with an accessible and easy-to-understand explanation of any equity release plan that they may potentially take – including the limits and benefits as well as any obligations. They will also have independent sign-off by a solicitor.

“Many people have the best intentions when it comes to planning for retirement, but rising living costs and other financial pressures are making it harder to amass an adequate savings pot. A person’s home is often their biggest asset and equity from it can be used for many purposes in later life: for example, funding travel or home improvements, paying off debts like an interest-only mortgage, meeting care costs or helping a family member to get a foot on the property ladder.”

Similarly, Steve Wilkie, a director Responsible Equity Release, claimed: “The difficulty the equity release market has faced shaking off the tag of being an expensive option, is that equity release plans are often compared with regular mortgages.

“This is an unfair comparison for two reasons; first, the interest rate on an equity release plan can be fixed for your lifetime, whereas with most regular mortgages the fixed length of time is two, three or five years.

“Second, an equity release doesn’t carry the same repossession risk as a mortgage because there are no monthly repayments to miss.

“Selling up and renting is an option too, although we see a number of clients who bought their property for £20,000 and it is now worth £250,000. Are these people going to be keen to step off the property ladder?”

“Interest rates for equity release are at record lows, with a 5.57pc fixed rate available. At this rate, the amount owed will double every 13 years, but over the last 13 years, house prices have gone up by more than 141pc.

“So, assuming property prices don’t move at all, if you take £20,000 of equity from your £200,000 home today, in year 13 you would still have £160,000 of equity.”

Dean Mirfin, a director of Key Retirement Solutions, added: “If you take all of these factors into account, for a client borrowing £50,000 against a property value of £250,000, the best ERC member equity release rate is 5.74pc fixed for life from Just Retirement.

“By comparison, to the best serviceable or interest payable mortgage rate available for say 15 years would be this is 4.99pc from Manchester Building Society. So for not making any repayments, a fixed rate for an unknown period of time and the no negative equity guarantee, the customer pays an rate just 0.75pc higher.”

In an ideal world, older homeowners would have plenty of cash and no need to borrow. But reality falls far short of that for many people after a dismal decade for the stock market and pension savings. So, there can be no doubt the problem is real enough but is equity release a fair deal or an excessively expensive solution? You decide.