What does Equity Release actually entail?
There is no doubt that Equity Release is getting a higher profile in the personal finance media, especially as for many people they have gambled on their property being a substitute for a traditional pension. I’ve got many views on most things and this is no different, but to me Equity Release has had a rough ride in the press for very distorted reasons.
What is equity release?
Firstly, a clear explanation of what we are talking about. Equity release refers to a range of products that let you access the equity tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both. Generally speaking there are two main types:
Lifetime mortgage: you take out a mortgage secured on your property provided it is your main residence, while retaining ownership. You can choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
Home reversion: you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, rent free, but you have to agree to maintain and insure it. You can ring-fence a percentage of your property for later use, possibly for inheritance. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
Reasons to consider Equity Release
There are myriad options within the above and because these are related to client specific circumstances it's impractical to go through each. What I can identity though is 3 main reasons why people consider equity release:
- Repaying an existing mortgage: I still see many older clients coming to the end of their working life with an interest-only mortgage outstanding (estimated to be nearly 3 million of these in the UK). Often the intention has been to sell the property and downsize, but funnily enough people can get quite attached to their home and no longer wish to move to pastures new.
- Increasing monthly income: Many Lifetime mortgages offer a ‘drawdown’ facility where you only pay interest on money as it’s released. For several clients who haven’t made separate pension provisions beyond the state pension, this can be an attractive option of topping up their income without affecting their income tax position or selling assets in their lifetime.
- Funding property improvements/adaptations: The desire to stay in the home for many is overwhelming, but there are times as clients get older they need to change how they use their house. The ability to fund adaptations to their current home enabling them to remain potentially for the rest of their lives is something I have seen a growth in ever since I started working with Equity Release clients
Whilst the above are all valid reasons to consider Equity Release, there are things to be aware of in considering this route.
Coming back to my point that Equity Release gets a bad press, to me this is simply due to a lack of communication within families. Most of the articles I read criticizing Equity Release are written from the point of view of grown up offspring, who feel let down their inheritance isn’t quite what they are expecting (or worse still, they felt entitled to). Whenever I am approached by clients looking to explore these options, I always look to involve the wider family so every party is engaged and there are no hidden surprises. I appreciate older clients may not like discussing their finances in front of their children but discussing the options as a family can mean other options are explored in the first instance that may be more cost effective.
This brings into play one of the main things to be aware of regarding Equity Release. The wider mortgage market has grown used to incredibly cheap money, both in terms of the headline interest rates and the associated fees. Despite the misleading press articles, the lifetime mortgage market is heavily regulated by the FCA and so professionals such as solicitors and surveyors are engaged to help protect the client’s interests in addition to the lenders. These of course cost money. The nature of lifetime mortgages from a lender’s financing point of view also means the interest rates are not as low as a ‘regular’ mortgage that a client’s children may be used to, again highlighting the need for open dialogue. That said, like the wider market, the rates on Equity Release products have fallen in recent years.
As a Financial Advisor, I treat my clients as adults, and feel the most important element of my profession is to help educate clients, so that with all the relevant information to hand, they and their families can make the decision they feel is most appropriate for them and that they are most comfortable with. Equity Release is one such option in many cases, and whilst it’s not appropriate for all, it’s something more and more clients are giving consideration to as part of their wider financial planning.
Charlie Wade is the managing director and IFA at Charles Wade Finance, an independent family-run Financial Planning and Mortgage practice based in Central and South West London.
If you'd like to check whether you're eligible for an equity release - use the VouchedFor equity eligibility checker here!