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More
pensioners than ever are mortgaging their homes to fund their retirement,
prompting warnings that such borrowing can be onerous.
Pensioners
are able to obtain cash advances secured against the value of their houses
through equity release or home reversion plans. Under
such schemes, people over the age of 60 sell their home, or a percentage
of their home, to a lender which collects on the homeowners death. In
return they receive a cash lump sum, or a monthly income, or a combination
of both. According
to the Council of Mortgage Lenders (CML) nearly 12,000 plans were sold
during the first half of 2003, up from 5,900 during the same period last
year. Overall,
total borrowing by pensioners through equity release schemes stands at £2.3bn.
But
the CML believes that in future the equity release market could reach £100bn.
"Many
pensioners are tempted by equity release as they are asset rich as a
result of increasing house prices but cash poor due to low retirement
income," a spokeswoman for Age Concern England told BBC News Online. Roll-up
There
are two main types of equity release plans: Interest roll-up loans and
home reversion plans. An
interest roll-up loan allows consumers to borrow money against the value
of their home and, in most cases, receive a lump sum.
Unlike
a normal mortgage, interest is added to the principal and paid back on the
owners' death, rather than repaid during the borrower's lifetime. The
amount owed can grow quickly as interest is charged on the interest added
to the loan each year, as well as on the original amount borrowed. Interest
rates on equity release borrowing also tend to be higher than on ordinary
mortgages at around 7%. Life
change
Under
home reversion schemes, home-owners sell all, or part, of their home, and
receive a lump sum, an income or both. But
homeowners who opt for this form of scheme will not receive anything like
the market price of their house, with lenders typically paying between 40%
and 60% of the property's current value. One
of the main problems with equity release plans arise when borrowers'
circumstances change. For
example, a borrower wishing to move to sheltered accommodation, or a
cheaper property, may have to repay some of the loan. In
addition, roll-up loans may leave borrowers with insufficient cash to buy
the new property they want. Borrowers
who decide to pay off the loan early can also be hit with big redemption
charges. "These
plans are not to be entered into lightly. It is important that people
research the market, take independent financial advice and discuss their
decision with members of their family who are due to inherit," Ms
Mordaunt said. Regulation
The
FSA takes over mortgage regulation in October 2004. While
mortgage based products will fall within its remit, the rules will not
cover home reversion schemes. In
June, the Treasury announced plans to consult on the regulation of equity
release schemes, often used as a means of achieving retirement income. The
Treasury has said the review, part of a wider look at the state of
pensions, could mean the FSA will win the power to oversee the sector and
ensure elderly people do not lose out. Copyright
© 2002 Global Action on Aging |
These
plans are not to be entered into lightly it is important that people
research the market 