Equity release ‘easy’ cash but is not without risks

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OLDER Scots are turning in rapidly growing numbers to potentially risky equity release plans as household bills climb and many face the threat of becoming mortgage prisoners.

A third more equity was taken out of homes in Scotland in the first half of this year than in all of 2012, according to new figures from Key Retirement Solutions.

The 527 equity release plans taken out by Scots over the period were worth £30.3 million, compared with 752 plans in 2012 with a value of £19.2m. Of the 527, more than half were taken out by homeowners in 
Edinburgh and Glasgow.

Equity release, which allows homeowners aged 55 or over to unlock the cash tied up in their property, was more popular in Scotland in the first half of 2013 than in any other area of the UK.

The most widely used type of equity release is a lifetime mortgage, where a loan is taken out against the home as either a lump sum, regular payments or a combination of the two.

The interest is typically rolled up and added to the amount, with the loan usually repaid with the proceeds of the eventual property sale, often after the homeowner’s death.

Home and garden improvements have long been given as the main motivation for taking out equity release plans – until now. A need for an emergency cash fund and help with regular bills was the biggest single reason given by Scots taking out equity release in the first half of the year, cited by 55 per cent.

A third used it to clear unsecured debts and 26 per cent to pay off the rest of their existing mortgage. Many older Scots with interest-only mortgages have been left with no choice to find another way of clearing their loan, and these figures suggest a large number are turning to equity release. Interest-only accounts for more than one in four outstanding mortgages and an estimated eight in ten of those maturing over the coming decade have no repayment plan in place.

Most lenders have walked away from the market, however, including Royal Bank of Scotland, HSBC and the Nationwide. Those remaining have imposed restrictions on their lending and the repayment vehicles they’ll accept. Lloyds Banking Group, for example, will no longer take cash savings (such as Isas) as a way of clearing the capital on an interest-only mortgage.

The problem is compounded by a reluctance among mortgage providers to lend on any terms to retired borrowers.

“With no means to clear the mortgage and little in the way of extension on terms being offered by lenders, many people are using lifetime mortgages to bridge the gap – and it’s an excellent way to solve the new issues that many are facing,” said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.

There are risks, however. While most equity release providers now have a no-negative equity guarantee, the plans can be expensive and the interest can mount up alarmingly.

“They were once very costly where the only option available was to roll the interest up over the life of the borrower, potentially eating away all the equity in the property,” said Mitchell. “This led to many a disgruntled complaint from the borrowers family when they found out their inheritance had vanished.”

But the market has improved, she added. “The risks are now nothing more than a standard high street mortgage in that it’s a debt on the property that can be serviced or not and that could wipe out the equity in your home.”

She urged anyone considering equity release to seek independent financial advice. “People also need to check their benefit entitlement as any equity taken and banked would account for means tested benefits,