FRANCIS SHENNAN
A MAJOR side-effect of falling interest rates could be to turn hard-up homeowners away from cowboy "sale and rent-back" schemes and towards regulated equity release.

The Office of Fair Trading this week called for a crackdown on the schemes, many of which offer desperate sellers far less than market value, allow them to stay in the property at full market rent, then evict them after as little as six months.

The National Landlords Association (NLA), which wants a voluntary code of practice, said its code would include enforceable legal sanctions and financial penalties for those failing to comply.

NLA chairman David Salusbury said: "Some property investors have seen the chance to make a quick buck. Gambling with people's homes is unacceptable. Changes to sale and rent-back must begin now."

But he added: "For some families who can no longer afford home ownership, ethical sale and rent-back should be explored."

Andrea Rozario, director general of Ship (Safe Home Income Plans), which represents 90% of regulated equity release providers, warned: "While there may be some ethical sale and rent-back companies, we are concerned about the number making misleading claims.

"There is no comparison between regulated equity release schemes, which have the protection of the Financial Services Authority in addition to safeguards by Ship, and the non-regulated sale and rent-back sector."

The two main differences are security of tenure - all regulated equity release products give policyholders the right to live in their homes for life - and no monthly rent, as equity release schemes do not require regular payment from policyholders.

Rozario said: "Misleading advertising can often lead consumers to believe these two types of product are the same."

Equity release also usually offers a guarantee against negative equity.

Last month consumer watchdog Which? warned equity release should be a last resort as it can be expensive, inflexible and leave little or no equity in your home, limiting choices later in life. Moving to sheltered housing or a retirement home, for example, may mean having to repay some of the loan earlier than expected, potentially leaving too little equity to buy the new property.

Which? recommends first considering downsizing properties, using existing savings or even borrowing from family and repaying when the property is eventually sold.

"Equity release might seem like the solution for pensioners struggling this winter," said Philip Spiers, co-author of the report. "However, money received may alter the benefits you are able to collect."

Dean Mirfin, business development director at the biggest specialist adviser Key Retirement Solutions, commented: "It is possible to release equity with no effect on benefits, dependent on the amount released and uses of the money. Specialist advice is essential.

"More providers now lend on sheltered accommodation, so the transition can be easier. Equity release is not a last resort."

Rozario added: "Which? has not taken into consideration market advancements of the past decade, let alone the last 12 months. Equity release products offer increasing flexibility. There are now products that offer fixed rates with little or no redemption penalties, and we have seen rates falling, in stark comparison to the mainstream mortgage market."

Equity release business by Ship members rose 14% in the second quarter of 2008 over the first quarter, releasing £276m compared to £243m. Moneyfacts also reported the number of equity release products increased over 25% to 60.

Those already with an equity release mortgage could save by switching to a more competitive deal. Lifetime mortgage interest rates have fallen over the last five years, with some now at 6.09% - 1% lower than some rates in 2003.

"After an initial period, exit fees no longer apply for some plans so consumers can make a saving not eaten away by fees," Mirfin said.

He quoted the example of a pensioner wanting to remortgage £98,791 who switched from Northern Rock charging 7.3% to Just Retirement charging 6.49%. The saving would be £5292 over five years, £17,110 over 10 years, and £37,623 over 15 years, with the re-mortgage fees added to the loan.

l Santander's UK banks have taken over combined sponsorship of the long-established Personal Finance Media Awards from Bradford & Bingley.

Herald personal finance editor Simon Bain and writer Francis Shennan have been shortlisted in the 2008 awards, to be presented in London next month.