Dangers of using home to pay bills

HOMEOWNERS have been warned not to view equity release as a panacea for debt problems after a sharp rise in the number of people unlocking money from their property to ease their financial difficulties.

More than a third of the money accessed in UK homes last year through equity release plans was used to repay debts, such as loans and credit cards, compared with just 11 per cent in 2008, according to Key Retirement Solutions.

Equity release plans allow homeowners to borrow money against the value of their home, with the debt repaid from the sale of the property after they die. There are two types, both of which are regulated. In home reversion plans, the home is sold, below the market value, to an insurance company in exchange for a lump sum payment. Lifetime mortgages involve a loan being taken out against the home as either a lump sum, regular payments or a combination of the two. The interest is just added to the loan amount and rolled up, and compounded monthly, with the debt eventually being repaid on the sale of the property.

The number of equity release plans taken out in Scotland plummeted in 2009 as homeowners lacking confidence in the housing market opted against unlocking equity from their homes. A total of 874 plans were taken out in Scotland last year, down 30 per cent on 2008, while the total value released was down 38 per cent at 30.8 million, said Key Retirement Solutions. Scottish homeowners using equity release unlocked an average of 36,441, with a growing number doing so to alleviate financial difficulties.

In previous years most equity release customers have used the proceeds for home improvements and holidays. But while more than half still use the cash primarily for work on their home, that figure has declined, while there are also fewer people using it to fund holidays.

The shift in the reasons for using equity release has been driven by the economic downturn, with 35 per cent of customers – including our case study – last year using their equity to pay off debts such as credit cards and loans, a 24 per cent jump from 2008.

Dean Mirfin, group director at Key Retirement Solutions, said the debt repayment trend mirrored a wider pattern emerging of people clearing debts to boost their income.

"Equity release is still providing a major boost to many retirees who have been hard hit by falling annuity rates and miniscule levels of return on their savings," he claimed.

Scott Pentleton, director of Alpha Wealth in Edinburgh, has seen a growing number of people inquiring about equity release as a way of resolving debt issues.

"There are a few issues people need to be aware of when entering into a lifetime mortgage contract with a lender, but on the whole I think it can be an appropriate solution," said Pentleton. As lifetime mortgages are targeted at retired homeowners, most applicants have a fixed income and defined budgets that offer little room for manoeuvre, Pentleton pointed out.

"For those who may be struggling monthly to meet their commitments, or those who can meet their commitments but it is impacting their lifestyle, then lifetime mortgages offer a solution."

The fees involved vary between providers, but combined legal, valuation and arrangement fees tend to be in the region of 1,500 to 2,000, depending on the property value.

There are pitfalls to be aware of, however. Homeowners using equity release to repay debts and avoid bankruptcy are effectively converting an unsecured loan to a secured loan, which could potentially aggravate their debt problems, Pentleton warned.

Other factors to take into account include the potential impact of releasing capital on an individual's welfare status. Pentleton recommended getting guidance on this from an adviser, HM Revenue & Customs (www.hmrc.gov.uk), the Pensions Service (0845 60 60 265) or from free advice organisations such as Citizens Advice.

It's similarly important to understand how the interest payments can build up. Pentleton advised working on the assumption that the initial debt would double after ten years and then double again after another ten.

"House prices will hopefully have risen over the same period, though, which would dampen its effect, but as we have all learnt again recently, house price rises are not guaranteed," he said.

Homeowners who are worried about eventually owing more than the value of their home should ensure that their provider is a member of the Safe Home Income Plans trade group, which has a code of conduct that features a no-negative equity guarantee clause.

• For more information:

www.ship-ltd.org

www.keyrs.co.uk/free-guide or call 0800 531 6010

Case study: Unlocking 30,000 from property gave us breathing space

LOWER house prices have put many Scots off using equity release plans to unlock cash from their homes. But for retired Montrose couple David and Christeen Black, the equity tied up in their property represented a useful source of funds to clear their debts and earn more financial freedom with which to enjoy their retirement.

Christeen, who worked in catering, and former gardener David unlocked about 30,000 from their property, primarily to pay off debts so they could create some financial breathing space.

"We paid off some credit cards and a loan so we wouldn't have to worry about them any more," said Christeen. "Getting rid of the repayments means that our money is our own, and this gives us more freedom to do what we want."

They found out about equity release in Reader's Digest and contacted Key Retirement Solutions to find out more. After reading the information sent to them and taking advice from the company, they sought the views of their three children before putting pen to paper.

"We thought about the long-term impact but they told us that it's our life, so we should just go ahead with it.

"We had already paid off our mortgage but we were living on our pension, so we thought it would be nice to have the money while we can use it."