Be careful about cashing in on your property

Britain is rapidly becoming a nation of homeowners sitting on wealth they cannot get at. Figures from the Land Registry show the average house price in Greater London has reached £250,000, and across England and Wales, £146,000. Lenders' data indicates the gap between borrowers' incomes and the value of their homes has never been higher.

So there is an almost irresistible temptation for many families to withdraw equity from the home. Datamonitor found secured lending jumped 37 per cent last year, suggesting homeowners are increasingly storing up problems by settling other debts, seeing the children through university or paying for home improvements while increasing the amount of the monthly mortgage. But if interest rates rise in the long term, the repayments may become unaffordable and the home may be lost if the debt is called in.

There is a different risk for older homeowners, many of whom also know they are sitting in a highly valuable asset, yet are faced with inadequate pensions or unaffordable care bills. For them, taking equity out of the home is an obvious solution, though – or because – it reduces the value of their estate.

"It is an area which will grow," Simon Jones, associate director at Savills Private Finance, says. Whether it is appropriate depends "on what else is happening in the family". Northern Rock is the leading provider of equity-release loans, or what the Financial Services Authority calls lifetime mortgages. "We insist on independent legal advice and the borrower must consult any family member with a vested interest in the property," Ron Stout, Northern Rock's public relations manager, says.

"If someone wants to pass the property to their dependants this is not the product for them, because the house has to be sold [on the borrower's death]. In fact, because of the changing property market, children are less dependent on inheriting their parents' property than they used to be."

Philip Spiers, partner in the specialist adviser Nursing Homes Fees Agency, says: "Equity release we use, perhaps where people want to stay in their own homes and be cared for there." It is not appropriate, he believes, where the homeowner is moving into residential nursing care, which is more likely to be financed through the sale of the house. "We see equity release as a last resort," he adds. "People also need to consider the impact on state benefits. We had one case where the local authority took 50 per cent of the equity release into account when assessing means for one woman's care-home fees."

Northern Rock is the only lender which offers a choice of lump sum, monthly drawdown and a mix of the two. Other leading lenders in the market include Scottish Widows, Britannic and Legal & General Bank. Rates vary: Northern Rock's Home Equity Release Mortgage, at 2.5 per cent over base (making it 6.25 per cent) and capped at 7.99 per cent, is among the most competitive.

Now Portman Building Society is piloting an equity-release mortgage and Newcastle and Stroud & Swindon building societies have recently launched products. But Nationwide Building Society says although it is interested, it is unwilling until regulation is tightened. It is urging the Treasury to provide CAT (charges, access, terms) standards for lifetime mortgages. The Treasury will not say whether it will do sp. Regulation and control are among the shadows hanging over the sector. Reputation has been blighted by the continuing memory of the mis-selling of home-income plans in the Eighties. Northern Rock says today's equity-release loans are guaranteed not to produce negative equity for repayment, so there is no parallel.

Lifetime mortgages will be regulated from October 2004 by the FSA, which intends classifying lifetime mortgages as high-risk products. This means only financial advisers with high levels of qualification will be permitted to sell them.

Ray Boulger, technical manager at Charcol brokers, says advisers who fail their examinations will instead push home-reversion plans, which are not to be regulated. He hopes the Treasury will decide these, too, need regulation. With a home-reversion scheme, the homeowner sells a stake in the property, retaining the right to continue to live in the house. Home-reversion products may release more equity from the home than a lifetime mortgage and unlike the latter, no interest is payable.

A new product in the market is the roll-up loan, which is like a mortgage but without interest being payable during the borrower's lifetime. David McGrath, manager of the specialist adviser Hinton & Wild, says: "Ownership of the home is retained 100 per cent with a roll-up loan. With reversion, one is giving up some or all of the home ownership, while staying in the home. Some people don't like giving up ownership."

Mr McGrath says home reversion schemes and roll-up loans should be arranged only with members of the trade body SHIP – Safe Home Income Plans–- as a guarantee of good conduct. And they should be considered only where the interest rate is fixed, not variable.

But it is available only to older homeowners. Northern Rock lends to those over 60, who can release up to 20 per cent of their equity. Those 89 and over can borrow up to half their equity. Charcol's Mr Boulger says younger homeowners should consider other ways of releasing equity. "For university fees, it may be best to set up a flexible mortgage. Then you borrow money as you need it with a drawdown."

For people wanting to take equity out of their homes the watchword must be caution. Getting it wrong may do more than damage your wealth: you can lose the family home too.

'The money has made my life much more comfortable'

Bill Thompson, a 75-year-old widower, raised £30,000 through Newcastle Building Society's Lifetime Equity Release Plan, borrowing against the security of his £200,000 home in Morpeth in Northumberland.

Mr Thompson, a former management consultant, found his savings and pension could not cover home improvements and a replacement car. He says: "I have been able replace the existing double glazing in my home with UPVC double glazing, install a patio sliding door and doors at the front and rear, have the roof relined and new guttering. It means I no longer need to paint the whole exterior of the house."

He also had an automatic garage door, making his sloping driveway safer. "By using the money for home improvements I am ensuring the value of the property continues rising," he says. "The money also allowed me to buy annual membership to watch the Newcastle Falcons rugby club. It's made life a lot more comfortable."

Interest is charged on his loan at 8 per cent (the rate has fallen to 7.5 per cent), rolled up and will be taken from Mr Thompson's estate. He could have borrowed up to £80,000, or 40 per cent of his home's market value.

Newcastle guarantees that if the value of a home falls below the total of the loan plus interest, the repayment is capped at the sale price of the home after the borrower's death.

Where you can find advice on equity-release schemes

* A free helpline is run by the Nursing Homes Fees Agency: 0800 998833;

* Copies of the Age Concern/Hinton & Wild book 'Using Your Home as Capital' are available free to 'Independent' readers who phone 0800 3288432;

* For a list of members of Safe Home Income Plans, phone SHIP on 0870 241 6060.