I recently read an advertisement in a National newspaper extolling the virtues of Equity Release and was surprisingly written on behalf of one of the main equity release brokers based in Preston. All fine I thought until I saw that it was aimed at grandparents struggling to buy Christmas presents for their grandchildren.
It created a small furore amongst my colleagues and peers. The blogs were alive with advisers & political commentators slating the fact that equity release was being considered for such short term measures. Not only that, but to take equity release to spend on the grandchildren, would effectively be spending their own inheritance! With the compounding effect of the interest over the remaining years, this will turn out as one expensive Christmas present.
After all, the most popular type of equity release is the lifetime mortgage; appropriately named & for a reason. These schemes are designed for longevity, not short term or for frivolous reasons, where better alternatives may exist.
Some were arguing that whatever legal reason people wanted a release of equity for, withdrawing capital was their choice, not ours as advisers, and on the face of it that is correct.
However, when I looked into this scenario further this played on my conscience for personal reasons and I had serious reservations.
I have five grand-kids, all under five years old. I had to check with my wife, but on average we spend about £150 to £200 on each. Extravagant ? Maybe. Worth it ? Definitely.
With various other gifts for family and friends we spend about £1,500. Agreed not easy on low pension income and little liquid savings.
If I was in that position and saw the advertisement I would almost certainly look into the possibility of equity release schemes. I would hope that I would employ the services of an independent equity release adviser i.e. someone like me who would strongly advise not to go down this route.
And here are the reasons why:-
The minimum initial lump sum on any equity release scheme is currently £10,000. This would have to equate to £2,000 for this Christmas, £8,000 in the bank for the next 4 Christmases. The cash in the bank may attract 1-3% interest whilst I would be paying up to 6% interest on the mortgage. Not a good idea
The set up fees, depending on the lender, could be as high as £2,000. Acceptable if you are considering a large expense such as buying a new car, a holiday of a lifetime, clearing an mortgage or giving the grand-kids a start in life for house deposit or university fees. Therefore, as a proportion of a £10,000 release, set up costs can be a considerable percentage of the initial release. Not so good to borrow £2,000 for Christmas gifts on this basis.
If, like me, your intended beneficiaries are your grand-kids then they are actually buying their own gifts via their future inheritance. Let’s assume £10,000 on a normal roll-up lifetime mortgage, even on the lowest rate with Aviva Flexi Plan currently at 5.62% (5.8% APR) and deducting the set up costs from this, would in 10 years have accrued to about £17,276. So 10 year’s worth of Christmas gifts has cost £7,276.
I applaud the fact that some of the broker companies are bringing Equity Release to the fore and the pros and cons of equity release schemes are highlighted to the general public.
As a dedicated Equity Release specialist I am convinced of the merits of raising capital by these means as long as the following measures are taken: -
- All possible alternatives are discussed with your adviser and broached with the children. Equity release is classed as a loan of last report by ourselves
- The initial release matches your needs for the first 12 months of your spending plans i.e. don’t take any more than you actually need
- You receive independent equity release advice from a FCA (Financial Conduct Authority) qualified adviser
- The schemes recommended are members of the Equity Release Council (ERC) which ensures they come with the equity release code of conduct indoctrinated
- You receive separate legal representation from that of the lenders. As from 2014, this will need to involve a face-to-face meeting with your solicitor for added protection
- You receive a Key Facts Illustration and Suitability Report covering all aspects of your adviser’s recommendation including set up costs, interest rate, future balance & early repayment charges.
I have personally seen the benefit equity release has made and have the testimonials to show the satisfaction & difference a lifetime mortgage can make to someone’s life.
If taken for the right reasons, under the right circumstances and with the right advice, equity release schemes can prove to be the right choice.
If you require further information on whether equity release schemes could be the right choice for you, please contact Barry Adnams on 0800 678 5159 or email [email protected].