Don't try to cash in on your home like this!

This new equity release style product has got the authorities rightly worried.

With the cost of living set to continue rising sharply for the next couple of years, it’s no wonder that many people are tempted to cash in on some of the equity they hold in their homes.

However, a new product offering to do just that has got the regulators very concerned.

At a Crossroads

Crossroads, a product from a firm named Asset Income Plan, has been launched, targeting people who want to release funds from their home.

Here’s how it works. An insurance company takes a legal charge on your property of up to 50% of its value. Then for a set period of time you will receive an annual income worth as much as 5% of the value of the property. Essentially, it’s a way of cashing in on your equity with no cost.

Sounds great!

Too good to be true

However, it’s got the bigwigs at the Financial Services Authority (the nation’s financial regulator) concerned, to the point that they have published a warning to people considering going for such a product.

John Fitzsimons looks at the pros and cons of equity release and explains why it doesn't deserve its dodgy reputation

There are a few reasons to be concerned. For starters, if a firm takes out a legal charge against your property, that means that it has rights over your property. So while Asset Income Plan claims that the only way you would have to sell your home is if the insurance firm were to be declared insolvent, this may not actually be the case.

And then there’s the fact that the firm is not actually authorised by the FSA. As a result, the ‘advisers’ who will try to sell the deal to you may not be authorised in financial services either. Hell, they may not have a single qualification to speak of. What’s more, you won’t be covered by the Financial Services Compensation Scheme, and won’t be able to take a complaint to Financial Ombudsman Service.

All in all it’s a deal that should be setting off alarm bells in your head.

Regulated equity release

The Crossroads product works on the same principle as equity release deals – it’s a way of releasing cash (equity) from your home. And not that long ago, equity release had a similarly questionable reputation.

Things have certainly been cleaned up in recent years though. Equity release deals are now authorised by the FSA, and there is a trade body – Safe Home Income Plans (SHIP) – which represents the vast majority of active firms, boasting a rigorous code of conduct that all members have to abide by.

Here is what all SHIP members have to guarantee their customers:

1. Customers will be allowed to remain in their property for life so long as the property remains their main residence.

2. Customers will be provided with fair, simple and complete presentations of their plans, setting out the benefits and limitations of the product, as well as any obligations they will face.

3. The right to move their plan to another suitable property without any financial penalty.

4. Customers can pick their own solicitor to conduct their legal work.

5. They will be provided with a SHIP certificate, signed by their solicitor, to ensure they are aware of the terms and implications of the plan.

6. All SHIP plans have a ‘no negative equity’ guarantee. This means that you will never owe more than the value of your home, and debt will never be left to the estate.

So how do equity release deals work?

Lifetime mortgages

Equity release comes in two different forms. The first version I’m going to look at is lifetime mortgages.

A lifetime mortgage is a long-term loan secured against your home. This means that while you are releasing equity from your home, you will still own 100% of the property.

And you won’t have to make any payments during the lifetime of the loan. Instead, the loan – and accompanying interest – will be paid off with the sale of the property when the plan ends (either when you die, or you move into long-term care).

This can be a negative though – as you aren’t paying off any of the loan that just means the size of the loan is steadily increasing the longer you live. Inevitably, this will have a detrimental effect on any inheritance you plan to leave to your loved ones, though there are plans available which will allow you to guarantee an inheritance.

Home reversion plans

The other type of equity release plan is a home reversion plan. In this instance, you will sell a percentage of your property to the provider, though still have the right to live there until you pass away.

It’s worth remembering that because you will get to live in the property, rent-free, for the rest of your life, the money that you receive will likely be less than the market value of the property.

On the plus side though, you know at the outset how much of your property you will be able to leave to your loved ones. What’s more, you can usually raise more money through home reversion than from lifetime mortgages.

The importance of advice

Equity release deals are not for everyone. In many cases you may be better off simply downsizing your property, or just remortgaging. However, with many older people struggling to get by, yet sitting on a very valuable asset, it can make sense.

If you do want to consider an equity release deal, the role of decent independent advice from an equity release specialist cannot be overstated.

To help you find an IFA in your area who deals with equity release, I’d suggest making use of unbiased.co.uk, a financial advice search engine. I’d also advise involving your family in the decision-making process, so that they know exactly what you are signing up for, and why.

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