Think carefully before signing up for a Home Equity Release loan

Home equity release contracts still need careful thought. 

Home equity release (HER) is a way you can access money using the equity in your home. It is like a reverse mortgage or deferred sale (settlement). It helps provide additional income for living expenses or helps pay for an item which is going to cost more than you can save from superannuation, benefits and other sources.

Our current view is that HER provides one way for older people to access money but is open to abuse.

Alternatives

You should look at as many options as possible for obtaining extra income before making a decision.

Other options could include: downsizing (buying a smaller unit or modifying the house so part(s) can be let separately); taking in friends or acquaintances as "flatmates"; renting the garden to community gardeners; selling to rent (and investing the money from the property sale); or making arrangements within families such as family members buying into the house or loaning money (but only if clear contracts and impartial legal advice are used).

The cost of borrowing

In reverse mortgage-type HER schemes, interest rates are generally linked to market rates, plus a margin. In most schemes the debt incurs compound interest.  That is, interest is added to the debt and interest charged on that interest unless repayments are made.

HER works best in a rising property market, which cushions the effect of compound interest.  However, as property prices flatten or fall,  HER debts can mount up to a significant proportion of a home’s value.   The implications need to be well understood and accepted by borrowers.

HER interest rates are higher by a couple of percentage points than mortgages, to cover the HER lenders' costs so they can be an expensive way to borrow.

Under deferred settlement schemes, you can receive instalment payments for your house from the buyer, over an agreed time. 

City councils’ rates deferment schemes are similar in operation. Under these arrangements debts can also increase if deferments are used repeatedly over the years.

You need to check with an independent adviser that using a HER scheme, especially to obtain regular income top-ups, won’t affect benefits or other entitlements.

The potential for abuse

We're concerned about the potential for mis-use of HER schemes.  We have cases of the financial abuse of older people reported to us every week. This is the mis-use of an older person’s money or property by someone in a position of trust. Older people may feel undue pressure from family, professionals or carers to obtain money through HER.

Code of practice

The Home Equity Release Products Code of Practice provides many protections we believe are essential.

Anyone looking at Home Equity Release (HER) loans should read the Code of Practice, and check that the lender supports all of it. If they don’t; then ask why not, very strongly.

We welcome the Code's emphasis on full disclosure and independent advice. We are pleased to see that guarantees are required so older people aren't faced with being removed from their own homes when their money runs out, and looks forward to the proposed independent disputes resolution process.

Comment

Our caveats about HER still apply. Home equity release lets you use equity that you've built up in your home, but it also limits your options. It means a lender has a say in your home ownership decisions. If you want to move in a few years, you may not be able to.

The current state of financial markets means that more caution than ever is needed. HER loans are now more difficult to get and any decrease in the value of your property will further decrease your remaining equity. 

We advise older people needing extra income to look at as many alternatives as possible before making a decision.

Resources

> VIEW the Home Equity Release Products Code of Practice and more information on the Office for Senior Citizens website