The option of equity release is becoming increasingly viable for people over the age of 55 as a way to unlock some of the money invested in their home. What Mortgage recently hosted a round table with some industry experts to find out what consumers should know about equity release mortgages
What is equity release?
Gordon Cunningham: Equity release is a very broad term which describes converting an asset, for example property, into readily available cash. It can refer to home reversion plans and lifetime mortgages but it could also cover downsizing to a smaller or cheaper property and remortgaging.
What type of products are available?
Mark Gregory: There are two main types of equity release plans; lifetime mortgages and home reversion plans. The lifetime mortgage is the most common type of equity release product while home reversion plans now account for less than 2 per cent of the market.
The reasons for the switch to lifetime mortgages has been flexibility. For instance, if inheritance is a concern, then some lifetime mortgages can include the inheritance protection option, where you can specify what percentage of the home you want to leave to your beneficiaries. A lifetime mortgage can be paid as a single lump sum or in smaller, drawdown amounts. Some lifetime mortgages can now even accept repayments with no penalty. You retain 100 per cent ownership of your property, which many people feel more comfortable about.
With home reversion, the equity release provider owns part or all of the property and because of that reason, we have seen a steady decline in home reversion plans.
What is the ‘no negative equity guarantee’?
Gordon Cunningham: The amount you pay back to the lender will never be more than the value of your home. The cost of the no negative equity guarantee is built into the interest rate.
Is the term ‘equity release’ confusing for consumers to understand?
Mark Gregory: Yes, I think it is. People sometimes assume that for the over 55s equity release means ‘rolled up interest’(see box on page 21). But lenders are trying to sway away from that with the launch of new products, such as interest-only, lifetime mortgages and retirement mortgages.
Does equity release have a bad reputation?
Mark Gregory: There was a stigma going back to the 1990s where some equity release products were sold but because of the fall in house prices people ended up in negative equity. These products therefore got a bad reputation.
Sharon Chapman: For all the reasons that have just been mentioned I think education of consumers on the subject is so important. We still need to convince the regulators that equity release can be a mainstream option.
Ray Boulger: Education needs to extend to journalists too. There are some journalists who continue to think back to the bad old days. Time is a bit of a healer but it is taking a long time to educate some people. Journalists have a role to play here because they have influence.
Gordon Cunningham: For people with a genuine need we have such a rigorous advice process before they even fill in an application.
Are equity release interest rates high?
Ray Boulger: Interest rates appear relatively high at 6 per cent, give or take a bit, so it is an easy target for journalists to say that this is expensive but education is needed here. In comparison, a 10-year fixed rate residential mortgage might cost you around 4 per cent but in fact there are other issues, such as the ‘no negative equity guarantee’ and fixed interest rates. When you look at that I think you can justify that the interest rate is actually quite reasonable for the sort of product it offers.
Are early repayments allowed?
Mark Gregory: Many products carry an early repayment facility and you can overpay by 10 per cent a year and if you downsize you can often pay the loan off with no penalty.
Gordon Cunningham: I had a client who wanted to borrow some money and repay it back in about five years time with no penalty if they decided to move and downsize. He wanted to lend the money to his son and daughter-in-law to buy a property, one was a trainee doctor and their current income was low but would improve with time. An equity release plan was able to tick all the
boxes in this scenario.
What do borrowers use the money for when they take out an equity release plan?
Gordon Cunningham: The reasons are continuously changing. It used to be for home improvements, a holiday, a new car but increasingly it is to cover everyday living expenses and pay off debts.
Ray Boulger: Increasingly parents and grandparents are helping their children to buy a property. The lower the deposit potential borrowers have, the higher the interest rate they will pay. If you look at the cheapest interest rate on a 95 per cent loan-to-value (LTV) mortgage and compare that with the cheapest at 90 per cent, there is a 1 per cent difference in the interest rate the borrower pays and it is similar if you compare 85 per cent and 90 per cent LTVs.
There are grandparents sitting on properties with no mortgage who would be quite happy to borrow a relatively small amount through equity release to either give or lend to their grandchildren – and it can be used as part of inheritance tax planning. What better risk is there for a lender to lend at a lower LTV to someone who has a guaranteed inc
ome for life compared to somebody with a high LTV mortgage who might lose their job tomorrow. If family can help their children to get a mortgage instead of the government it’s a great advantage.
The problem is equity release looks expensive at first glance but it can be the best option for some.
Chris Pond: The reasons people release equity has changed; it’s now more often used out of need rather than for leisure purpo
ses. The Department of Health is looking to have an increasing engagement with equity release because
of its relationship to long-term care.
Is equity release risky?
Chris Pond: The equity release industry has been regulated by the Financial Conduct Authority (FCA) since 2004 but it’s not very prominent on their radar screen and they perceive it still to be a high risk product, although that is changing and the FCA’s attitude is coming more into line with reality now.
Mark Gregory: The FCA does regard equity release as high risk and I can see where they’re coming from. Because of the age group, some people may be vulnerable. Therefore, we need to have the necessary controls in place and a rigorous advice process followed to ensure best advice is given.
Sharon Chapman: The regulator is still to be convinced that equity release is a good mainstream option.
Do other countries have equity release?
Chris Pond: We are one of the few member states within Europe to have equity release. Spain and Portugal have small markets; there is also Australia and America.
How much does it cost to take out an equity release plan?
Chris Pond: There are valuation fees, legal fees and set up fees, which can vary quite considerably but the total cost could be around £1,500 plus the adviser fee.
Ray Boulger: The basic principle on cost is the same as an ordinary mortgage – the smaller the mortgage, the higher the impact of costs.
Gordon Cunningham: The costs are pretty much fixed if you are taking out £20,000 or £200,000, so in percentage terms, the smaller the mortgage the greater the cost.
Do you need to use a specialist adviser?
Gordon Cunningham: There is no prescriptive process to giving advice but I’m sure if I sat down with Mark, our fact-finding processes would be very similar. We do this day in, day out, whereas one-man bands or general mortgage brokers might only work on equity release products once a year so their knowledge might not be as comprehensive.
It’s a different conversation than we would have had in 2007 to 2008; we make everything clear to the consumer, including the risks involved.
Mark Gregory: Definitely, the more cases you’ve done as an equity release adviser, the more experience you have. You can’t just pass an equity release exam and expect to advise. This decision can be life changing, not just for the clients but also their beneficiaries. There are so many factors to take into account and many different types of plans and features. Advisers need to have a good understanding of the whole market before advising customers.
Chris Pond: Equity release should be part of normal retirement planning, that’s not to say that someone should have to take out an equity release product but it could be something they might consider as part of their retirement planning. The Equity Release Council has its own adviser checklist which requires that you have an audit trail and the customer has been made aware of everything.
Sharon Chapman: This is one of the reasons why some of the building societies are looking at partnerships with equity release specialists. That way building societies can provide their own solution without having to turn the customer away. For some of these customers they may have been a member of the building society for 40 years so if it can say ‘we can’t help you but we are in partnership with somebody who could offer you advice’ that’s another reason why some societies are looking at moving into the space. This is good customer service and there is something to be said for someone being able to go to one place where you can be directed to the right person. I don’t think people suddenly say ‘I must speak to a equity release adviser’, that’s not how people think and that’s another reason why some lenders are looking at partnership arrangements to find the right expertise in the right areas.
Chris Pond: I think that’s right, you don’t want to be sending people from pillar to post.
How do people find out about equity release?
Mark Gregory: Our clients tend to come through our website at first and they have usually done a bit of research themselves and have a basic understanding of what equity release is.
What they’re looking for next is guidance as to which is the right product for them. Our job is to sit down with them from day one and carry out a fact find to find out about their situation, what their objectives are, what their financial situation is and what the reasons are for doing equity release – because there are some weird and wonderful reasons why people take it out.
And also as an adviser, from the legal point of view, you have to be more careful with regards to what the money is being used for. There is a lot of gifting going on at the moment, genuine gifting and maybe not so genuine gifting, and that’s something we’ve got to be very careful about.
Do you ever advise potential clients not to take out equity release?
Gordon Cunningham: Yes, we do. For example, we make sure the client is claiming any state benefits they are entitled to and that sometimes boosts the person’s income so they actually don’t need to go along the equity release route. The first thing we do is ask them why they want to use equity release and assess if it’s right for them.
Mark Gregory: Using other options first is sometimes best before turning to equity release and we will be upfront about that.
Why do you have to ask people what they want to use the money for?
Mark Gregory: We want to make sure we are giving clients the best advice and they are doing this for the right reasons.
Gordon Cunningham: If I go through the diligence process with a 94-year-old widow who says she wants £50,000 to go on holiday – that sets alarm bells ringing.
Advisers will carry out background checks and it’s also important to have independent legal advice. The solicitor’s brief is to try to determine as much as they can including whether or not the client is being coerced.
Mark Gregory: It has been known for a solicitor to appoint another solicitor to check that the person is taking out equity release for the right reasons – that backs up the solicitor’s own indemnity insurance.
Is legal advice needed for equity release?
Chris Pond: Yes, it is a requirement of the Equity Release Council’s Code of Conduct. It is vital that people understand what they are doing so there are numerous checks throughout the process.
The Equity Release Solicitors Association (ERSA) is the trade body for solicitors that specialise in this area and is part of the Equity Release Council. It is advisable to use a solicitor who is a member of ERSA although people can use their own solicitor. We also have a Consumer Protection Working Group within the Equity Release Council.
Do you encourage clients to involve their children/family in the talks?
Mark Gregory: We always suggest children should be made aware and even be present at the meeting. As a rule, Equity Release Supermarket advisers ask the client’s children to also sign the Suitability letter as it evidences the fact they are fully aware of their parents intentions.
Gordon Cunningham: You have to be very careful because sometimes the clients don’t want their children involved.
Are there any age limits?
Gordon Cunningham: The minimum age is 55, although for most providers it is 60. There is no maximum age but individual circumstances will be taken into account.
How much equity can you release?
Mark Gregory: It depends on the provider, but the maximum for a lifetime mortgage is up to around 55 per cent of the value of the property. For home reversion, clients can sell up to 100 per cent of their home. However, the clients should only take what they actually require.
We expect more new providers and products, with an ever higher uptake predicted for 2014.
Chris Pond: There is so much equity in the market that is untapped but attitudes to homeownership are changing and people want to use the equity in their homes for various purposes.
Hi – i am enquiring for my mother who has a property in Portugal, no mortgage but a loan thru friends due to renovation of EUR40,000 that needs to be repaid. She is 71 years old, UK national, resident in the property in Portugal and has a UK pension on which she lives. Local banks will not lend as she has no income nor will they do an equity release or use the property as collateral. My brother and I are trying to assist but drawing a blank as we are not in Portugal so cannot liaise on her behalf with local entities or co-sign.
Can you assist?
Specialist overseas mortgage broker Simon Conn says that in Portugal the maximum age for a mortgage is 70 or if age 75 the mortgage must have commenced by the maximum age 65.