It was once regarded as a last resort for desperate cases, but equity release has been reinvented as the saviour of the asset-rich, cash-poor middle classes: those who own half-million-pound homes but struggle to meet their monthly credit card repayments, or those who have realised – too late – that their pension funds will not provide for a particularly comfortable retirement.

Equity release now appeals to a younger audience. Research from Norwich Union shows that those approaching retirement are twice as likely to consider equity release as retired people. Most cited additional income as their main reason for wanting to withdraw equity from their homes, although 6 per cent admitted that they needed the money to pay off debts. It is also popular among divorcees, 12 per cent of whom have used equity release to fund a divorce settlement or buy out a former partner, Saga says.

“Equity release is shaking off its tarnished reputation,” says Willie Mowatt, director of postretirement products at Norwich Union. “The industry is better regulated, there is a wider range of products and providers offer more competitive rates.”

After a decade of unprecedented house-price growth, the sector has boomed. Figures from Safe Home Income Plans (Ship) show that only £32.5 million of equity was released from homes in 2005. By last year the total was £1.2 billion and Key Retirement Solutions, the equity release specialist, says that the amount of equity released from UK homes is up 26 per cent so far this year.

A lifetime mortgage, also known as a roll-up mortgage, is the most popular type of scheme. Homeowners are permitted to borrow up to 50 per cent of the value of their homes while retaining the right to live there until they die, sell the house or go into long-term care. Interest owing on the lifetime mortgage is rolled up and repaid after the house has been sold. The percentage of the property’s value that you are permitted to borrow depends on your age. At the moment a 55-year-old would be able to borrow about 20 per cent, while someone in his or her nineties could borrow the full 50 per cent.

Equity release is generally not available to those under 55. “If you have severe health problems, some providers will drop the minimum age to 50,” says Dean Mirfin, of Key Retirement Solutions. However, because interest rolls up, taking a lifetime mortgage in your 50s is expensive. “The longer you have a lifetime mortgage, the greater the cost,” Mr Mirfin says. “If you looked at a calculation of what it would cost you to take a lifetime mortgage before the age of 55, it would put you off.”

There are some schemes designed for borrowers who are not yet retired. “A couple of products allow you to make monthly repayments while you are still working and allow the interest to start rolling up once you retire,” Mr Mirfin says.

The other type of equity release scheme is a home-reversion plan, under which you sell all, or part, of your home to an equity release provider but retain the right to live in the property for the rest of your life. However, you do not receive the market value for your property – you are more likely to receive about half – although the amount depends on your age and state of health. Home-reversion plans are available only to those aged 65 or over. “The younger you are when you take the plan, the poorer the terms,” Mr Mirfin says. “As you get older, the terms improve.”

When looking for the right product, it is important to take advice. Schemes are complex and there are many factors to consider. Do you want a single advance or drawdown? Is the scheme fully portable? Do you wish to protect a portion of the value of your property against the build-up of interest? Talking to an equity release specialist will also help you to secure a better deal. “Fewer than half the schemes on offer are available direct to the consumer,” Mr Mirfin says. “For most, you have to go through an intermediary.”

Mr Mirfin points out that if you go straight to a provider, you are likely to pay a higher rate, too. “People assume that cutting out the middle man will make the deal cheaper, but some direct providers charge astonishing amounts.”

He gives the example of a retiree borrowing £50,000 from Prudential over 20 years. Going direct to the Pru he would be charged 6.84 per cent, costing a total of £187,779. Had he arranged the deal through an adviser, he would have paid 6.49 per cent, bringing the total to £175,852 – a saving of nearly £12,000.

Where to find help if something goes wrong

Homeowners who opt for equity release can complain to the Financial Services Authority (FSA) and the Financial Services Compensation Scheme if something goes wrong.

In April the home reversion market was brought under the regulation of the FSA, joining other forms of equity release schemes, such as lifetime mortgages, which the watchdog has regulated for the past three years.

In October the FSA penalised a lifetime mortgage provider for the first time, fining the Minel group £10,500 for exposing customers to the risk of being badly advised.

CASE STUDY

Terry Russell was only 56 when he took out his lifetime mortgage with Norwich Union.

The part-time data protection officer, says: “Until a few years before that I had been caring for my parents so could only work part-time. I had a reduced income and a lot of extra expenditure, so I had built up quite a lot of debt. After my parents died I thought that by living carefully I would be able to pay off the debts, but a few unexpected bills came in and I realised that I would not be able to maintain the house properly unless I did something about the debts.”

Because Mr Russell has no dependants and does not have to worry about leaving his home to anyone, he decided that a lifetime mortgage was the most logical way to clear his debts. Mr Russell was allowed to borrow 19 per cent of the value of his home and says: “I took the full amount because there was no reason not to – there is nothing to pay back until after my death.”

In addition to paying off his credit cards, Mr Russell was able to pay for a new roof as well as a number of other home improvements.