The hidden dangers of equity release schemes

Equity release schemes are forecast to soar in popularity as the elderly fall back on the value tied up in their homes to top up dwindling pensions.

Figures from the Council of Mortgage Lenders (CML), the trade body for the industry, reveal that the equity release market is worth £1bn a year. The National Consumer Council (NCC) predicts this will soar to more than £4bn a year.

Yet concern remains about the potential for mis-selling. From 31 October, lifetime mortgages - one of two types of equity release scheme - will be regulated by the Financial Services Authority (FSA). But home reversion plans, the other type, won't be.

Lifetime mortgages are coming under the regulatory umbrella because the FSA believes they are higher risk. They are also the most popular form of equity release, accounting for 75 per cent of the market.

But critics don't agree that home reversion schemes are less risky or less in need of regulation. Ed Mayo, chief executive of the NCC, warns: "Both types of scheme are complex, risky and can offer poor value for money."

And Jackie Bennett, senior policy adviser at the CML, says: "We believe that home reversion schemes should also be regulated to ensure that elderly homeowners receive an appropriate level of protection across the board."

With a lifetime mortgage, homeowners take out a loan secured on the property. Interest is usually rolled up and repaid with the capital when the property is sold. Lifetime mortgage lending grew by nearly 69 per cent last year, according to the CML.

Home reversion plans work slightly differently: these are not loans but a sale and lease agreement. Homeowners agree to sell all or part of their property to a home reversion company and are granted a lifetime lease. When they die, the percentage that was sold "reverts" to the company. The NCC criticises the schemes for being poor value for money, as they give owners just 20 to 60 per cent of their home's market value.

The typical minimum age for people using equity release is 60, while the average loan taken out in the second half of 2003 was £44,000.

The NCC believes home reversion plans must be regulated by the FSA because they can be difficult to understand. It is vital the elderly know what they are signing up to, as the agreements are irrevocable and homeowners are locked in. Given that many people turn to equity release when they are in serious financial need, there's a good chance they'll be too desperate to pay attention to the small print.

Currently, a voluntary code of practice exists which is run by trade body Safe Home Income Plans (Ship). Providers choose whether to sign up or not, and many of them haven't: Treasury estimates show there are 41 firms offering equity release, but Ship has only 14 members.

To make matters worse, Ship has no legal teeth, doesn't monitor compliance with the code and doesn't run a compensation scheme.

The upshot is that consumers are likely to be more confused than ever. If they buy a lifetime mortgage, they will have access to the Financial Services Compensation Scheme. But if they opt for a reversion plan, there's no chance of compensation if something goes wrong.

The CML is also concerned that the lack of regulation of reversion schemes could mean they are offered at more favourable rates because companies won't have to include the cost of regulation. This could be the deciding factor for an elderly person choosing a scheme - even if it's not in their best interests.