The number of people using equity release schemes doubled in the first half of 2003. But it doesn't look like there's a major scandal in the making... yet.
There's growing concern about equity release schemes, following the news that the number of new loans doubled in the first half of this year. Some people even think it could be the next big financial scandal.
Although the number of loans has risen rapidly, the amount owed on equity release schemes is still relatively small, at a 'mere' £2.3b. In contrast, Brits owe a whopping £714b on traditional mortgages. The difference in the number of loans taken out is also huge: in the first half of 2003, 11,700 equity release schemes were taken out, versus 1.3m mortgages. However, forecasters predict the amount outstanding on equity release could balloon to £100b+, based on the fact that more and more people's wealth will be tied up in their home in the years to come.
There are a number of features that make equity release schemes ripe for scandal. They are products with a long lead time so, if you pick a poor scheme, it could be many years before the full damage becomes apparent. By then, it could be far too late to do much about it. They are also complex products sold to a vulnerable audience, plus they aren't regulated either (although some schemes will be in the near future).
That said, they do have their attractions for those who, for whatever reason, don't want to move home. Interest rates are currently around 7% but, unlike most mortgages, they are fixed for the life of the loan. With most longer term fixed-rate mortgages costing around 5% to 5.5%, this isn't terrible value, when you consider that the lenders do not know when their money will be returned.
Nevertheless, an interest rate of 7% causes a debt to double in a little over 10 years (10 and a quarter, in fact). The average loan taken out in the first half of this year was £43,000, which is about one-third of the value of the typical home. Long-term, assuming inflation stays at its current low level, you'd expect house prices to rise at a rate slower than 7%. So, the amount you owe will steadily eat away at the equity in your home.
The increase in equity release schemes should have one benefit though. A healthy dose of competition should bring down interest rates a little. I'm not sure what the profit margins are on equity release schemes, but I would guess that they are fairly substantial!
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