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The Actuary The magazine of the Institute & Faculty of Actuaries

Consumer caution on equity release

Equity release schemes for the retired are being tipped as a major growth area in retail financial services. Retired homeowners are estimated to be sitting on property worth £700bn.

But the Consumers’ Association said last month there were big flaws with some of the plans, which could be punitive, complicated, and expensive. One of the main problems with equity release plans arise when circumstances change, reports Which? magazine. For example, if someone wanted to move to sheltered accommodation, or a cheaper property, they may have to repay some of the loan. In addition, roll-up loans might leave someone with too little equity to buy the new property they want. Customers can also be hit with big redemption charges if they decide to pay off the loan early.

There is also a general criticism about equity release plans, because they reduce the value of an estate, meaning the family will receive little or nothing when the planholder dies. Someone should first consider whether they would be better simply selling up and trading down, Which? said.

Helen Parker, editor of Which?, said: ‘We advise people considering equity release schemes to view them as a last resort. These “lifetime mortgages” don’t have to be paid off until you die, but while this means you don’t have to worry about paying off the loan now, it can cause problems if your circumstances changes, and of course you will also have less to leave behind.’