The equity release loan market in the UK has seen significant amounts of growth over recent years, as more and more people use the value locked up in their home to help to fund their retirement, pay off existing loan debts, or help their children and grandchildren with a home owner loan deposit.

The Equity Release Council (ERC), the trade body for the equity release loan industry, has predicted that this year will see even more growth in the market, largely due to new and innovative equity release loan products, as well as increased consumer awareness of equity release loans.

Around 45 per cent of ERC members believe that new loan products will make equity release more attractive to home owners throughout this year and 38 per cent think that increased consumer awareness and understanding of equity release loan products will encourage more people to take out such a loan.

This is the first such survey conducted by the Equity Release Council since it was launched last summer. Previously it was known as SHIP (Safe Home Income Plans), but since that time, the membership has been expanded to include Solicitors, Financial Advisers, charity organisations and surveyors, as well as loan providers.

Nigel Waterson of the Equity Release Council said “As more people approach their later years with a question mark hanging over their finances, equity release loans offer many a common sense and practical alternative to selling their homes or falling back on state support.”

“The safeguards supported by the Council’s code of conduct and the work of our standards board are designed to protect consumers’ best interests and mean that over 55’s in 2013 can engage advisers with confidence to discuss how equity release loans can benefit their retirement.”

There has been much talk over the course of recent months regarding the growing problem of interest only home owner loans and mortgages, as more and more of these loans approach their maturity date without the borrower having any method of being able to repay the loan.

The problem seems to be most marked amongst retired people over the age of 65, whose loans are fast approaching the time when they should be paid off, yet many retirees are still making monthly payments on their home owner loan, at a time when they should be free of any loan debts.

A survey of retired people by the equity release loan provider, More 2 Life, has revealed the scale of the interest only loan problem amongst the over 65’s, with those individuals who still have an outstanding loan balance, having an average loan debt of around £43,000.

More 2 Life is trying to convince the Financial Services Authority that there needs to be a warning system in place for those with interest only loans who find themselves in this position, similar to the system used with endowment policies alongside home owner loans, with red, amber and green warnings.

This would draw attention to the problem and allow borrowers to do something about it before their loan reaches the eventual maturity date.

Jon King of More 2 Life said “The interest only loan time bomb is purely and simply about the looming repayment date for mortgages and loans. Customers can pay the interest but they need to find substantial sums to clear the capital borrowed.”

“The concern is that people hope for the best which is why regular warning letters from lenders will help concentrate customer’s minds. Lenders themselves already acknowledge it is a major issue and many are concerned.”

Ever since the credit crunch, banks and building societies have become more cautious about who they are prepared to offer loans to, with most taking a much tougher stance on underwriting issues and long term affordability of the loan and eventual repayment.

As a result of this, most lenders will look at an application for an interest only loan with additional scrutiny, as this shows signs that the borrower is unable to afford the full cost of a repayment home owner loan or mortgage, thereby raising concerns for the lender, even if the borrower has a suitable plan in place to repay the loan at maturity.

To show just how bank and building societies attitudes have changed towards interest only loans over recent years, a new survey has highlighted the reduction on lenders who offer this type of loan for a home buyer.

The research, which was conducted by Moneyfacts, revealed that prior to the credit crunch in 2007, there were 79 lenders in the UK who were prepared to offer an interest only loan. However, today this number has fallen to just 22 and most of these are for much lower loan to value levels than previous loan offers.

Of the main high street lenders in the UK, only the Woolwich, HSBC and Clydesdale Bank are currently offering interest only loans to clients, with all the other interest only loan deals being offered by smaller, specialist lenders.

Other lenders, such as the Coventry, RBS and the Co Op, have only just pulled out of the interest only loan market last August, despite the fact that the Financial Services Authority’s review into the Mortgage and home owner loan markets, did not ban interest only loans.

A spokesperson for Moneyfacts said “When considering an interest only loan, the borrowers must make sure that they are aware of all the information and choose the right deal to suit them. You are unable to rely on the sale of your property at the end of the loan to fund any debt that needs to be paid.”

Although endowment policies have largely become a thing of the past, many people still have old policies in force which they had previously used in connection with an interest only home owner loan, even if the loan has now been switched to a repayment basis and the policy holder is still paying premiums on the policy until maturity.

As many of these policies are now becoming redundant for the loan purpose they were originally taken out for and many people are struggling with their finances, cashing in their policy may seem like an attractive way of getting some ash and cutting down on monthly expenditure all at the same time.

However, there are usually significant penalties incurred when an endowment policy is surrendered, which is why Close Brothers have launched a new endowment loan product, which allows policy holders to take out a secured loan against their policy, thereby getting some cash whilst maintaining their life cover and full bonuses.

Policies must have between two and five years left to run and once the loan has been agreed, Close Brothers will take over the payment of the policy premiums, partly to free up more disposable income for the policy holder, but also to ensure that these are paid until the maturity date.

The loan amount, along with any interest and premiums paid, will then be deducted from the maturity lump sum generated by the policy when it eventually does mature.

With many policy holders unsure about what to do with their endowment, particularly as many of them are unhappy with the current projected returns from their policy, taking a policy loan could be a viable option for many who could use some cash at the moment and Close Brothers estimate that there are somewhere in the region of 2.5 million policyholders who could qualify, with a total of around £30 billion invested in endowment policies.

When people are unsure of their best options when it comes to taking out a new loan, or borrowing additional funds through a loan secured on their home, many individuals will seek some form of independent financial advice, from an adviser or loan broker, to ensure they are getting the best loan deal they can.

A recent survey amongst advisers has found that around 47 per cent of advisers and loan brokers have recommended a secured loan to their clients as an alternative to a re mortgage on their home, especially when it comes to clients who have an interest only loan as their main home owner loan or mortgage.

The survey, which was conducted by V Loans, found that almost half of financial advisers have considered a secured loan as the best advice and loan solution for their clients. 27 per cent of those interviewed said that they had not yet considered a secured loan for clients and the remaining 26 per cent who completed the survey said that they would never consider a secured loan as an alternative to a re mortgage loan.

A secured loan is a serious option to consider for home owners looking to release some equity from their house, particularly if the home owner has an existing interest only home owner loan which they do not wish to switch to a repayment basis.

Dave Pinnington of V Loans said “It’s encouraging to see that almost half of the brokers surveyed do consider secured loans as a viable alternative to remortgaging for their interest only clients. Apart from being particularly flexible, the low redemption penalties and loan rates starting from 5.59 per cent, secured loans will allow home owners to raise additional capital whilst leaving an existing mortgage deal intact, making the idea of re mortgaging much less appealing.”