Equity Release 

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Equity release essentially allows property owners to borrow money against the value of their property.

Equity release plans - also called home income plans, lifetime mortgages or home reversion - have become a very popular form of raising additional income for homeowners, particularly to boost pension payments and other income, pay off credit cards and other existing debts and pay for medical treatments, cars, holidays and home improvements.

Equity release may also help minimise inheritance tax payable by the estate by reducing the value of the property, provided the value of the house grows at a slower pace than the interest rate on the mortgage.

A lifetime mortgage is a loan secured against the borrower's property, with no regular repayments to make as the loan and interest are rolled up and usually repaid when the borrower dies or if they need to move into long-term care.

Lifetime mortgages can also include a drawdown option that enables homeowners to unlock some of the value in their home by releasing an initial amount of money and keeping a reserve fund available that can be released as and when needed in future. Equity release providers believe that drawdown will account for 70 per cent of the market by 2010.

Home reversion plans enables borrowers to sell all or a percentage of their property in return for a cash lump sum. The borrower will get less than the full market valuation of their property as the money is provided upfront and they continue to live in the property.

Buy to let property landlords can use equity release plans to free up tax-free cash for further property purchases without selling off property. The equity or value of their portfolio is based on its open market value less any outstanding mortgage or other debt secured against it.

The UK equity release market is predicted to double over the next five years to £2.4 billion by 2013, due to big high street names offering equity release products to their customers, more intermediaries gaining the necessary qualifications and equity release innovations taking into account consumers changing needs.

The UK equity release market was partially regulated in 2005. All mortgages, including lifetime and interest only arrangements, now fall under the remit of the Financial Services Authority (FSA). Many lenders have signed up to Safe Home Income Plans (SHIP), a voluntary code of conduct that includes a no negative equity guarantee. At present, 90 per cent of the equity release market in volume terms is represented by SHIP members.

As a result of the credit crunch, smaller lenders have found it increasingly difficult to raise funds in the financial markets for equity release plans. The UK equity release market has, therefore, become increasingly dominated by the larger equity release providers, most notably Prudential and Norwich Union, who are able to raise funds from within their own organisation.

Falling house prices have also led to a decrease in the amount of money that can be raised through equity release plans, as these plans are based on the value of the property.

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