Older people who try to raise money by releasing the equity on their homes could be plunged into a financial nightmare, according to a new Which? study.
We looked at 39 products from 24 different providers and found that equity release schemes can be expensive, inflexible and leave people with little or no equity in their home.
The risks are so great that Which? believes these schemes should be used only as a last resort.
Which? Editor Malcolm Coles said: ‘If you’re over 60 and worried your pension won’t be enough to live on, an equity release scheme might seem like a good idea. However, think long and hard before committing to one of these high-risk products.
‘Lenders want to sell you a lifestyle dream, but the reality can be very different. These schemes could turn into a financial nightmare which can stay with you the rest of your life.’
We found that borrowing GBP 80,000 through a typical lump sum roll-up equity release scheme on a GBP 350,000 property could end up costing GBP 256,570 after 20 years or GBP 343,350 after 25 years. These amounts are paid back from the money raised when the house is sold.
There are alternatives to equity release that should be considered first, such as downsizing or even borrowing from family, who could be paid back when the house is eventually sold.
Those who need to increase their income should check their eligibility for state benefits, and those who need money for essential property repairs or improvements should check their eligibility for a local authority grant.
In addition, Which? believes the way some of these high-risk products are advertised is irresponsible. Norwich Union, for example, suggests its scheme could pay for a trip to New York or ‘something for the family’.
But if someone took out the minimum loan of GBP 15,000 with Norwich Union, in ten years they would owe around GBP 28,000.