LONDON: Older house owners have been warned against opting for equity release schemes. At least, such schemes should be the last resort for home owners to raise cash, says consumer group Which?.
Equity release schemes allow owners of homes, mostly older retired individuals to take out loans against their property. The loan is repaid when the house is sold, usually upon the owner's death or when he or she goes into nursing care. The accumulated interest is added to the final settlement figure.
Malcolm Coles, Editor of Which? magazine, said these schemes are expensive, inflexible and leaves the house owners with little or no equity. "These schemes could turn into a financial nightmare which can stay with you the rest of your life," he warned.
Citing an example, he said a homeowner borrowing 80,000 pounds against his 350,000-pound property could owe 343,350 pounds after 25 years at the usual 6 per cent interest -- virtually disowning everything.
Coles said the schemes should be avoided altogether, because they are not yet regulated by the Financial Services Authority.
Which? singled out Norwich Union, largest insurer and lender in the U.K., saying some of its advertisements are irresponsible and misled the customers. They even suggested that there are schemes that could pay for a trip to New York or “something for the family”.
Teresa Fritz, principal researcher at Which?, said the advertisements of many lenders are misleading but "none are quite so in your face as the Norwich Union advert".
She said there are better schemes in the market, like the one provided by Age Concern in association with Northern Rock bank, which offers an affordable interest rate, there are no exit penalties for prepayment and the firm puts a number of barriers in the way of people taking out an equity release loan.
Norwich Union personal finance unit marketing director Darren Carter justified the advertisements saying these were designed to create an interest in the scheme, but no one is able to buy an equity release product without a series of meetings, including one where a family member of the house owner is present.
He said all lenders are required to provide illustrations of how the borrowed amount would grow over years because of the compounded interest and "Norwich Union always painted a worst case scenario".
The 4.6 billion-pound equity release market had almost doubled between 2002 and 2003 but slowed down because of the slackening housing market.
Mortgage industry reacted to the Which? report saying the criticism is misplaced as it did a disservice to the needy house owners, who had no other alternative source of income. A spokesperson for the Council of Mortgage Lenders, said Which? is right about cheaper methods of borrowing, but equity release schemes are useful to those older people who have no access to other sources of funding.
A spokesperson for Safe Home Income Plans (Ship) said that all its members are directed to ask people to get advice before committing to a plan. Norwich Union is a member of Ship. He said the money drawn from equity release schemes was "increasingly being used for lifestyle purchases" rather than necessities, and as such he would support the schemes being advertised. "If we don't advertise equity release how are people going to know about it?"
Posted
on : Fri, 06 Jan 2006 02:05 GMT | Mortgages News
By : Mike Lawson
|
