THE headlong rush by pensioners to unlock money from their homes has undergone a sharp slowdown in recent months as new rules on equity release begin to bite.

Figures published yesterday by the Council of Mortgage Lenders show that sales of lifetime mortgages, which make up 95 per cent of all equity release schemes, fell in the first half of this year compared with the second half of 2004.

From January to June a total of 10,800 people took out lifetime mortgages worth £492 million. In the previous six months 15,000 people took out loans worth £693 million.

With lifetime mortgages pensioners take out a loan secured against their property and receive a cash sum or regular income while the loan capital and interest roll up until their death or move into residential care.

The latest slowdown follows a dramatic increase in the equity release market in the past decade. In the mid-1990s it was worth a modest £50 million a year but by 2004 this had grown to £1.2 billion a year.

Jon King, chairman of Safe Home Income Plans (Ship), the industry trade body, said: “The main reason for the slower growth in recent months has been the introduction of regulation. Lifetime mortgages came under the regulation of the Financial Services Authority last October and the effects are still working their way through the system.

“Product providers and independent financial advisers are diverting their efforts away from making sales and concentrating hard on making sure they deal properly with the new regulation.”

Another reason for the reduced level of sales was the industry’s switch from traditional schemes where the value of equity being released was paid out in one go to more flexible ones which pay out only part of the available money initially, which reduces the impact on the figures.

A further brake on sales growth is expected as the second part of the equity release market becomes regulated. The Government announced in the Queen’s Speech in May that it will be bringing home reversion plans under the FSA’s umbrella as soon as possible. Legislation is currently being fast-tracked through Parliament and should come into force next year.

Home reversion schemes, which make up about 5 per cent of the equity release market, allow the elderly to sell part or all of their home to a company in exchange for a cash lump sum and a free lifetime tenancy.

Consumer groups such as Age Concern and Which?, formerly the Consumers’ Association, had said earlier that had the Government failed to regulate equity release schemes they could have become the next mis-selling scandal. They feared that commission-hungry salesmen would take advantage of vulnerable pensioners, raising unrealistic hopes and glossing over the risks.

ON THE HOUSE

Mortgage-backed plans: a loan, taken out against property, is repaid with interest when owner dies or goes into care