Equity Release Escapes Mortgage Meltdown

The credit crunch has savaged almost every corner of the mortgage market with one notable exception -- equity release.

Lenders may be raising rates and tightening criteria on traditional home loans, but lifetime mortgages, the most popular type of equity release scheme, have actually been getting cheaper. You can now get rates below 7%, fixed for the lifetime of the loan. That's only slightly above residential rates.

Equity release allows you to unlock the capital in your property, and spend it on whatever you like. It's aimed at retired people who are struggling on low incomes and who also have a lot of spare equity in their home.

After a brief dip in demand at the end of last year, sparked by Northern Rock's demise, demand has remained solid.

Indeed, retired people released £390 million from their homes in the last 12 months, up 13% on last year, according to specialist advisers Key Retirement Solutions. The picture is very different when you look at the conventional mortgage market.

Please release me

So how come equity release has keep its head when every other type of mortgage is losing theirs?

One reason is that a equity release works like a standard mortgage in reverse: rather than raising money to buy a house, you sell a chunk of your property's value to raise money.

You can't default on your loan, because you don't make any repayments until your house is finally sold, which is when you die or go into care. That makes it a safer bet for the lender.

The other reason is that more and more elderly people are finding themselves in dire financial straits, and for some, equity release could be their only option.

Free yourself

One in three people nearing retirement still haven't paid off their mortgage, according to Key Retirement Solutions. They owe £37,316 on average -- 20% more than a year ago.

It gets even worse for people over 70 who haven't cleared their mortgage. They owe a terrifying £45,493 on average.

Around one-third of equity release customers now use the payout to clear their credit cards or personal loans, and liberate themselves from debt.

But equity release isn't without its costs. The most you can borrow is around 40% of your property's value, but as interest on the loan rolls up, it could quickly munch through the remaining equity.

That could sever your kids from their inheritance -- which is why it is vital to seek independent advice, and involve your closest family in any decision.

Positive equity

In practice, many kids would rather see their parents enjoy the money than struggle through their final years to leave an inheritance they might not even need. But to avoid family ruptures, check anyway.

Some schemes, notably home reversion schemes, an alternative to lifetime mortgages, allow you to guarantee a chunk of your property goes to your children.

If you're taking out a plan, protect yourself by choosing a provider that has signed up to industry body Safe Home Income Plans (SHIP). Members guarantee you and your partner can continue living in your property, and that no matter what happens to property prices, you will never owe more than your home is worth.

This is called the no negative equity guarantee, and it's invaluable. It means the lender is carrying the risk of falling house prices, rather than you.

But falling property prices now pose a serious challenge to equity release. The further prices fall, the less equity you can release from your property.

It's a simple equation. If prices fall 10%, you have 10% less capital to unlock.

That means if you think equity release is for you, you should start exploring your options sooner rather than later.

It can take two or three months to set up a scheme, and you don't have to commit yourself right at the beginning.

Escape the crash.

Falling house prices strengthen the arguments in favour of a type of lifetime mortgage known as a drawdown plan. With this plan, you negotiate a cash reserve based on the current value of your property, but only draw a small chunk of that reserve immediately. You are free to draw more cash at a later date, if you wish.

The cash reserve is based on your property's value when you set up the scheme, which protects you from falling house prices. Better still, you only pay interest on the money you have withdrawn from your reserve.

Equity release definitely isn't for everybody. You should explore every other alternative first, including maximising income from state benefits, getting help from family and friends and moving to a smaller, less valuable home.

But if you've run out of options, and you're facing a bleak and impoverished retirement, it could put the spring back in your step. Just don't hang around.

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