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Equity Release on the rise – but be very careful!
14 August, 2018 4 minutes reading time
Equity release is becoming a popular way for over-55s to supplement their retirement income as people live longer after retirement.
However, specialist financial advice is crucial, especially given recent calls for stricter regulations. Professor Kevin Dowd’s report suggests that falling property prices could make equity release loans unprofitable for providers, potentially leading to significant losses if the market declines for an extended period.
These schemes are typically available to those aged 55 or 60 and above. The borrowing amount depends on factors like age, property value, and sometimes health. The Equity Release Council reports record borrowing of £971 million by homeowners aged 55+ in the first quarter of the year.
The appeal of immediate cash while staying in one’s home is strong, but equity release has potential drawbacks.
So, how does it work?
The Basics
In recent years, a much wider range of equity release products have come on the market, but most usually fall into one of two types:
Lifetime mortgages. These allow you to borrow a lump sum or smaller amounts against your home. The loan is repaid when you die or move into long-term care. These mortgages are becoming more flexible, with some allowing occasional repayments. Newer deals may also include drawdown facilities and inheritance protection, enabling you to set aside a specific amount for loved ones. There are three main types:
- Roll up mortgages. No monthly payments are required; interest is added to the loan balance.
- Interest-only mortgages. Only the monthly interest is repaid; the original loan amount remains unchanged.
- Home income plans. You receive a regular lifetime income (an annuity) based on your age, but the interest is deducted from these payments.
Home reversion plans. You sell part or all of your property to a provider for a lump sum or regular income while continuing to live there.
Potential Problems with Equity Release
As with any financial decision, carefully reviewing the fine print of each plan is crucial. Here are some potential issues to consider:
Seek specialist financial advice. House prices may not always rise. While the PRA is considering rule changes regarding negative equity assumptions by lenders, ensure the liability for negative equity lies with them, not you.
High interest rates. Equity release mortgages often have high interest rates. Lenders, typically repaid only after your death, maintain profitability through these rates. Relatives have reported shock at the amount of interest accrued, significantly reducing the inherited value of the house.
Below-market value with home reversion plans. You’ll receive less than the market value of your property. Providers, anticipating a long wait for repayment, offset this risk by offering less.
Your pension credits and other state benefits might be affected if your income or savings exceed the limits set by the government. Age UK’s benefits calculator may help you.
Positives
Potentially, there are some positive outcomes. Take inheritance tax for example.
By taking out a plan on your house, the equity released will be taken from the value of your assets accordingly. As a result of your death, this will likely reduce any inheritance tax that would otherwise be payable. Inheritance tax is only applied if the estate’s value exceeds £325,000.
It is also worth considering that interest-only mortgages almost disappeared following the financial collapse in 2008, and they were once called a “ticking timebomb”. These have been revived for older borrowers, so look at the details carefully before going down this route.
How can I safeguard myself from bad lenders/providers?
Fortunately, a body was explicitly created to protect you in equity release matters. Safe Home Income Plans (SHIP), under the Equity Release Council, is a trade body with a strict code of conduct. If you go with a SHIP-accredited company, you are covered against the worst possible practices.
90% of all providers are accredited to SHIP, but it is still worth checking so you don’t fall foul of the unscrupulous 10%. Since 2014, all equity releases must be sold as part of an official advised process, and checks are made on whether the provider has followed the rules and guidelines.
Our Advice
Always get specialist financial advice before signing up for an equity release scheme.
Furthermore, the Equity Release Council’s advice suggests that providers direct borrowers to speak to their families and beneficiaries and obtain independent legal advice. They make efforts to ensure that this process is followed.
For further help or advice, please contact us. We’re here to help.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.