The Consumer Panel commissioned actuaries Watson Wyatt to undertake research into the value of equity release products and to provide a comparison of the costs including the cost of selling and buying a smaller home. Lifetime mortgages and Home Reversions are the commonest equity release products available. A standard lifetime mortgage involves a homeowner taking out a mortgage with interest being rolled up and added to the total outstanding loan instead of any monthly payments being made. The debt is repaid on selling the property when the homeowner dies (or goes into long term care), and most have a no negative equity guarantee, so the debt should not exceed the value of the house. A home reversion involves the home owner selling all or a proportion of their property at a discounted rate for a lump sum.
Then, when the owner dies (or goes into long-term care), the property must be sold and the agreed proportion or entire proceeds of the sale price given to the reversion provider. Home reversion products came out as twice as expensive as the next most expensive option, if the plan only runs for 10 years, assuming house price inflation of 4% a year.
Using the same assumptions, it seems that a 65-year-old would have to live for 30 years to see anything like the same value from a home reversion as a lifetime mortgage.
John Howard, chairman of the Financial Services Consumer Panel, said: "Many people see their house as a potential source of income when they get older but equity release deals often don’t look like good value. This analysis compares the costs and provides useful information for homeowners to make the best decision for them. At the same time, the research seems to show that companies are not making excess profits from these products. However, taking out any equity release product is a complicated decision and we would advise consumers to take advice before signing up to any of them. Home reversions are due to be regulated by the Financial Services Authority (FSA) shortly. Consumers should be aware that there is no obligation on financial advisers to tell customers that down-sizing without taking out any financial product, is likely to be the cheapest option."
