Equity Release

Are property owners at risk by signing up to an equity release deal that allows them to gain access to the cash that is tied up in their property? Would they be better off selling their home and downsizing to a smaller one? Research shows that in a lot of cases homeowners would be worse off in the long run by releasing equity. Most home owners would be better off selling their home and moving to a smaller property.

If the homeowner is looking to release an amount of cash, let’s say around £50,000 from a property that is worth in the region of about £250,000, in around 20 years time they could be more than about £150,000 worse off by choosing one of these options. To put it another way, they would be paying about £7,500 in a year to just stay in their own property.
These are the thoughts and conclusions of the FSA (Financial Services Authority) who has done research in these types of schemes.

In most but not all cases the most effective way of releasing equity from a property would be to sell and move to a smaller home. However in some cases it made more sense to opt for a lifetime mortgage. The home reversion option still seems the most expensive way in all cases.

A lifetime mortgage is a loan that where the interest is not paid monthly but added to the end sum of the loan, which would increase the overall debt. In the case of equity release the loan often doubles in size within about 12 years even if the interest rates are fixed. The loan only gets repaid when you sell your home and leave.

A home reversion plan works differently, by a company buying a share in your property for less that the current market value. The company allows you to carry on living there, in most cases rent free. When the property is sold the reversion company takes its share of the proceeds.

The consumer panel reports that customers should be aware that there is no obligation for the advisors to tell the customer that their best and cheapest option would probably be to sell their property and move to a smaller more energy efficient home.

These reports are due to research that has uncovered that more than £1.1bn was drawn through equity release plans throughout the year. The studies are to help people realize the options that they have got and hopefully make people aware that selling their home is an option. Equity release options have got to be weighed up, the age of the client is often one of the factors and costs vary due to how long people live and what happens to property prices.

A lifetime mortgage can become poorer value for money the longer someone lives for because the interest charged is on accumulated interest. A home reversion plan is much worse value if the customer dies soon after taking one out.

Researches tried to balance out the facts by working out what the client’s estate would be worth once a home reversion company had taken their share.

Some equity release companies disagree with the researches that say selling a property and buying a smaller one is a cheaper and better alternative because of all the legal fees that the customer would incur. If someone wants to stay in the home they love but release a bit of cash from the equity in their property then this does not cost anything to the customer. The researches have also forgotten the emotion side to moving home, some of these people could have lived in their home for over 10 years and really don’t want to live anywhere else, they may have good neighbors and be close to family. Even if the customer does decide to move at the moment there is a shortage of decent small properties or even retirement homes to move to so they are demanding top prices, even though some people have chosen the option to move, some of them still find themselves needing to release equity a year on.