“It’s a scam, you will lose your home, you will get ripped off! The interest will eat up the value of your home”.
Yes I have heard all of these comments when discussing Equity Release, and many ‘armchair experts’ who do not know what they are talking about tell my clients “don’t do it”!
Yes in the 1980’s these schemes caused difficulties, when it was assumed that property values would rise each year and that property price inflation would consistently be higher than mortgage interest rates. In the 1980s thousands of retired people were encouraged to take out variable rate mortgages and put their money into stock market-related investment bonds. The income from these bonds was expected to be sufficient to pay the interest on the mortgage and provide additional income. But the market produced poor returns on the bonds as recession arrived, and at the same time interest rates rose and property values fell.
Equity Release or as they are also called Lifetime Mortgages have now been overhauled and a new set of rules and regulations were brought into force by the Financial Services Authority (FSA) or as it is now called the Financial Conduct Authority (FCA).
Firstly any Adviser who gives advice on Equity Release, Lifetime, Retirement Mortgages and Home Reversion Schemes MUST be properly qualified and hold two important Qualifications which they will have had to study and prove their knowledge by passing strictly enforced examinations. They can then have the designated qualifications on their business cards and letterheads. These qualifications are CeMAP and CeRER.
CeMAP – Chartered Institute of Bankers Certificate in Mortgage Advice and Practice.
CeRER – Independent School of Finance Certificate in Regulated Equity Release and Home Reversion Schemes
Next was that all Equity Release Plans had to follow the standards set by SHIP (Safe Home Income Plans) this has now been superseded by the Equity Release Council.
Firstly a very important one called the Negative Equity Guarantee, this means that even if there was a calamitous property crash and you owed more in capital and interest than your home was worth, then that’s a problem for the lender not you, you can stay in your home until the last survivor passes on or moves into long term care and no debt is carried forward to your remaining family.
You MUST receive Independent Legal Advice, this is at the end of the application process when you receive your copy of the Offer, the solicitor will discuss with you the details of the offer and ensure you are under no pressure to sign or accept the offer from the adviser or family and check that the offer is as you requested and explain the fees, charges, features, benefits and any disadvantages. It is best to use a solicitor who understands Equity Release as a great many do not. Your adviser can recommend Solicitors that do.
So why are we seeing a major increase in the arrangement of Equity Release schemes? With interest rates at an all time low, returns on savings and investments are very poor and people who are retiring with Money Purchase Pension Funds are finding that their pension funds are not purchasing anything like the pensions they were hoping for! So those plans for world cruises, luxury travel and holidays or even a decent retirement income/lifestyle just cannot afford it. YET the one thing that has increased in value will be their home. Hence the saying ‘Property Rich, Cash Poor’ so why struggle if you are sitting on hundreds of thousands of pounds in property value, why not release some of that Equity to accomplish those goals whatever they may be.
Bank of Mum & Dad! We have seen that in the current housing market young couples are struggling to save that all important deposit, and again this is where Equity Release can be a very useful tool, as Mum & Dad do not have to use those life savings. They simply release funds from their property and help their children or even grandchildren onto the housing ladder.
So what is Equity Release? Sometimes called a Lifetime Mortgage or a Retirement Mortgage.
It is simply a mortgage, which you do NOT have to make repayments on. The Interest is added and when the last surviving owner of the home ‘pops off’ then the executor/beneficiaries have up to 12 months to sell the property at full market value and the loan and interest is repaid (they can of course buy it themselves).
Equity release amounts are based on your ages and the value of your home, whether your house or is Freehold or Leasehold. You can also get enhanced amounts if you suffer from ill health.
Equity Release Interest is usually on fixed interest basis but you can also have an indexed, capped or variable rate.
Equity Release can be a Lump Sum Only, or a Lump Sum with a Cash Reserve Drawdown account. It works like an overdraft facility you would have access to a sum and can take amounts from that facility at any time, minimum withdrawal £2000. So you can create an income facility.
There are NO restrictions on what you spend the release funds on, holidays, cars, home improvements, debt consolidation, helping family, redeeming existing mortgages or even existing Equity Release plans that have become uncompetitive.
The Equity Release Lifetime Mortgage is very flexible and offers the opportunity, to move and transfer the equity to a new property, you can downsize, repay all or part of the mortgage and also release more funds later on as both you and your property get older!
Another important issue is that some people believe that releasing Equity and the compound interest that ‘Rolls up’ will erode all the remaining Equity in your home, I always complete a Property Growth Projection Versus the Interest Roll up so that my clients can see that this is NOT the case. It is based on the increases in your property’s values over the past 5 and 10 years and setting a modest figure for the next 5 and 10 based on those increases, and remember that the vast majority of Equity Release is taken with Fixed interest rates.
One other way of using Equity release is to purchase a new home, if you wish to move or downsize, instead of releasing Equity on your existing home you raise it on the property you are about to purchase.
One thing to be very aware of is fees. There are fees with any Equity
- Valuation Fee (Most lenders now offer it as a free feature)
- Lenders Arrangement Fee (Some lenders charge a fee, usually from £595 to £995 and this can be added to the mortgage)
- Legal Fee: £550 Plus VAT, this is to add the mortgage details on to the Land Registry, Set-Up, Funds release, completion and the Independent Legal Advice.
- Broker Fee: All Equity Release MUST be arranged through a Qualified Equity Release Adviser. Their fees vary considerably. The most expensive are Age Partnership who charge 2.2% of the amount released and Key Retirement who charge 1.95%.
So for example a £100,000 release would mean a broker fee of:
Age Partnership = £2200.00
Key Retirement = £1950.00
Richard James Partnership = £990.00
If you are interested to learn more and see how Equity Release may help you, then you need to see a Qualified Equity Release Adviser.
The steps the adviser will take are:
- Initial Telephone Consultation to check eligibility.
- If eligible, the adviser will research the entire Equity Release market to ascertain if what you are looking to release is possible.
All research and advice at this stage is at NO cost to you.
Equity Release is highly regulated and you can be confident that your qualified adviser will guide you through the Equity Release process with NO obligation and no pressure. Equity Release is very strictly regulated for your protection.
I hope this article has been informative and educational and hope that it has given you confidence to perhaps find out more.
Please feel free to contact me for an initial Free consultation:
Freephone 0800 197 8838
Direct Line 01202 896037
Mobile 07971 376782
This is a Lifetime Mortgage, to understand the features and risks ask for a personalised illustration.
Robert Ducker is a Registered Individual of Richard James Partnership Ltd who are directly authorised and regulated by the Financial Conduct Authority under reference number 301173.