Unlocking equity not the answer – Which?
Consumer group is urging pensioners to consider other options first
Published:
PENSIONERS struggling to make ends meet should only consider unlocking equity from their home as a last resort, a consumer group has warned.
Which? said equity-release schemes could be expensive, inflexible and leave people with little or no value left in their property, severely limiting their choices later in life.
It added that any money people released from their homes could also affect the amount of means-tested benefits for which they qualified.
Equity release enables retired homeowners to unlock money from their property without having to move.
People can either take out a mortgage on their home that is not repaid until they die or sell their property, with interest often added to the amount they owe, or they sell a portion of their property to a home-reversion company. The schemes are expected to rise in popularity, as people live longer, face rising care bills, and increasingly turn to their property to supplement their pension.
But Which? said that problems with the schemes could arise if the borrower’s circumstances changed.
It said someone who wanted to move into sheltered housing or a retirement home may have to pay back some of their loan earlier than they expected, potentially leaving them with too little equity to buy a new property.
Equity-release schemes that are approved by the Safe Home Income Plan (Ship) can be transferred to a new property, but this does not always cover sheltered housing or retirement homes.
People downsizing may also find their new home is worth less than their loan, meaning some of the money they had borrowed would have to be repaid.
The group added that in some cases there could also be high early-redemption charges for people who wanted to end the schemes within the first five to 10 years.
The group urged people to consider other options before turning to equity release, such as downsizing to a cheaper property, using their existing savings, or even borrowing money from family that could be paid back when their home was eventually sold.
Which? also advised elderly people struggling with their finances to check whether they were eligible for any state benefits they were not claiming or grants that would assist them with the cost of living.
Andrea Rozario, director general of trade body Ship, said: “There are now products that offer the security of fixed rates with little or no redemption penalties, and recently we have seen rates falling, in stark comparison to the mainstream mortgage market.
“This, coupled with safeguards offered by Ship members and compared to normal mortgages, not only means that the products are safe, but also incredibly flexible.”
Alex Edmans, Saga business development manager, said: “Saga welcomes the comments from Which? Magazine, which highlight the need to seek proper financial advice before committing to equity release, however, we disagree with their views that equity release should only be considered as an option of last resort . . . However, as Which? mentioned, equity release could reduce your entitlement to some state benefits.”
