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A Consumer&#39s View

Safe Home Income Plans has just reported a significant increase in the sales of equity- release schemes.

At £240m, sales are up by 143 per cent on the past two years, with new mortgage and annuity schemes accounting for nearly £85m of the total and home reversions for the balance of £155m. Overall, about 5,131 schemes were completed.

Chairman Mark Goodale makes the point that, with the proliferation of home-income schemes, it is inc-reasingly important that consumers are guided to “safe” products where their interests are protected.

He says: “This takes on added significance in the light of the recommendation by the Government-backed Foresight financial services panel that, against the background of a continuing move to an ageing society, financial services providers develop more innovative, flexible products and services to help individuals manage their lifetime financial needs, including a trusted home equity-release product.”

Quite so but what are the product providers and, in particular, the mutuals doing about this? Not a lot.

No doubt, Ship will be pleased with its latest figures. But 5,131 equity-release schemes are a drop in the ocean compared with the vast numbers of elderly homeowners who could potentially benefit.

The low level of take-up of equity release reflects the inescapable fact that, with the notable exception of Northern Rock&#39s monthly drawdown mortgage scheme, most equity-release schemes are poor value for money.

Annuity-based schemes do little to improve the income of the elderly homeowner. Elderly homeowners are, quite rightly, reluctant to enter into an agreement which eats up a substantial proportion of the equity in their homes from day one.

Most fear that the money might as well have been washed down the drain should they die soon after signing up.

The potential market for equity-release schemes runs into millions and it is a scandal that the mutuals, in particular the giants such as Nationwide, have not been leading the way in offering the mortgage drawdown-type of scheme. It has taken a commercial bank, Northern Rock, to produce the scheme that most elderly homeowners want.

We all know the reason why. The big mortgage lenders like the existing home ann-uity schemes because they are profitable.

The brokers like the existing schemes because they get paid a handsome commission. Yet neither the home annuity schemes nor home reversion schemes are popular for the obvious reasons that the former provides little in the way of extra income and both are positively a waste of money for the homeowner who dies soon after taking out the scheme.

All credit to Northern Rock for pioneering the drawdown mortgage which allows the homeowner to borrow only as much as they need and take the loan as monthly income. This type of equity release is far more efficient, too, since the “income” is technically a loan and tax-free.

So why don&#39t more institutions offer mortgage drawdown? The answer is that they cannot be bothered to set up the system to administer such a scheme.

They don&#39t like the fact that there is no income until homeowners start to die because all interest is rolled up and added to the borrowing.

This could be a valid excuse for commercial banks not offering drawdown mortgages. But it is no excuse for the big mutuals such as Nationwide, which has the resources to set up such a scheme and, as a mutual, can afford to take a long-term view on profitability.

Nationwide should be ashamed of its response when questioned about offering drawdown mortgages. “We have no plans to do so,” was the response.

Perhaps some members ought to ask a few searching questions at the next AGM and put the management on the spot. This is one area where mutuality could genuinely provide a much needed service to elderly members.


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