Having advised on equity release schemes for over 17 years, I’m fully aware withdrawing capital from your home is a very important decision. It is probably the biggest financial decision you may take during later life. It is, of course, usually the largest asset by far that any of us will ever own, and will have been paid for through hard work during our working lives. It’s therefore fully understandable that clients who are considering a lifetime mortgage often ask these similar questions:
• Are many people doing these schemes?
• Would you do it yourself?
• Are they as expensive as people make out?
• Would you be happy if your own parents did it?
Let’s look at these in turn:
The Equity Release market is showing rapid growth year on year, with a record £2.15 billion released in 2016. We’ve just seen figures of a new record of £800 million released in the last quarter alone and estimates are that it will break £3 billion in 2017.
Yes, I would release equity myself in later life. I do have children, and I suppose I’ll eventually have grand-children but if I need to, or want to, I’d have no hesitation. I have provided for my children and given them a good start in life.
It’s a common misconception that equity release is expensive, however it now has the lowest interest rates ever, starting from just 3.47% MER. Couple that with some of the low set up fees on record, where we can obtain free valuations, no application fees and cashbacks.
Would I be happy if my own parents released equity? Well, as you’ll read below, it nearly happened!
An Equity Release Appointment with my Parents
I was sat with my parents around 3 years ago enjoying a cup of tea casually asking what holiday plans my had parents made for the coming year, but was shocked with their answer that they couldn’t really afford to go away anymore. My thoughts turned to my occupation as an equity release adviser and I was concerned that I’d not made them more aware of how these equity release schemes worked. I suppose it’s bit like being a decorator who never has time to decorate his own house.
I gathered myself and asked if they’d considered the following options:
• Would they consider downsizing?
• Could they apply for means tested benefits, like pension credit or council tax reduction?
• Would they consider selling and moving into rented?
• Could they look at Equity Release?
Parents Concerns About Equity Release
Their first response was ‘we wouldn’t want to release equity as we wouldn’t want to reduce yours and your sister’s inheritance.’ I hear this quite regularly, but neither myself or my sisters want an inheritance and we’d much prefer that they were comfortable. Until I have met my clients, some do feel that by taking a release of equity they may even leave their children nothing, even owing the equity release provider money themselves!
Once I have explained and reassured them that these schemes are fully regulated by the FCA and include the No Negative Equity Guarantee, enforced by the Equity Release Council, they realise equity release is a safe product and full of the assurances they were looking for.
Lifetime mortgages have developed considerably over the past three years, however there are options built within the plans that could have allayed their fears. Parents do often feel obliged they must leave children, even grandchildren an inheritance, but more often this is because they never received one themselves. Attitudes have changed, and now parents have actually started releasing cash for their children, rather than just themselves.
Inheritance Protection Design & Features
To ease parent’s concerns over how much to leave their beneficiaries, options now available include an inheritance protection guarantee. Some lenders automatically include this feature, should the maximum equity release not be taken, whereas others charge for the privilege. Inheritance Protection ensures beneficiaries retain a fixed percentage of the property, once the house is eventually sold. This option is offered by most lenders such Aviva, Legal & General, More2Life & Retirement Advantage, to name but a few.
Another method that could have alleviated my parents’ concerns would have been to employ balance control measures, so that the equity release mortgage didn’t roll-up in the future. One of the most innovative inheritance protection features to-date has been the option to make voluntary payments back to the lender. By making repayments of upto 10% of the original loan amount, parents can stop the debt rising, maintain a level balance, even reduce the debt over their retirement. This facility is now offered by all lenders & those in addition to the aforementioned include Pure Retirement, LV=, Hodge, Just Retirement and OneFamily.
Another way of reducing the amount owed would be to use an equity release scheme that operates with a drawdown facility, rather than taking the maximum lump sum initially. By taking the cash in smaller chunks than all as one lump means parents are only charged interest on money they’ve withdrawn, rather than the whole amount. Most lenders operate these facilities and is the reason drawdown lifetime mortgages are the most popular type of equity release mortgage.
Use Equity Release to Upsize or Downsize
An equity release scheme would also enable parents to remain in the house where they’d live for around 40 years, and would also save the inconvenience and costs of actually moving. Because of the low value of their property they couldn’t downsize, as they wouldn’t get much for their money in the area they live, or would consider moving to. Additionally, downsizing would not have given them enough spare cash left over, to serve any purpose. Often, you can use equity release to help fund a cheaper, or more expensive property but the maths didn’t add up in their case. They were already in receipt of a small amount of pension credit and council tax reduction, and couldn’t get any further help.
Did My Parents Rue Their Decision?
So, the only other option would be to sell completely and move into rented accommodation, which is the option that they eventually chose. They sold their 3 bed-semi and moved into a small 2 bedroom flat on a retirement complex. This move had some advantages, such as they now live in a nicer area; they have a large amount of accessible cash in the bank; property repairs are paid for and carried out by the management company. Although they’re in relatively good health they no longer have to manage stairs and have less cleaning to do.
But, 3 years on, was not taking equity release the right move?<
Firstly, although they deposited the proceeds from the sale of the house into various deposit accounts, they feel scared to spend too much of this money as they’re always conscious that they will need to pay rent for the rest of their lives. Secondly, although they live in a nice area, they do miss their old house, and the extra space it had. Thirdly, interest rates are so low that they are receiving little interest from their savings. These savings have also made them ineligible for means tested benefits.
Overall, the jury is out on whether it proves to have been the best move for them. They have asked whether they could use their savings and the proceeds of an equity release to buy a property again, so that they no longer have to pay rent, so they have still got options.
As we’ve seen equity release is decision that needs to be carefully considered, especially with family members. My experience is that most children fully support their parent’s decision to release equity. Incidentally, two of my colleagues at Equity Release Supermarket have set up a lifetime mortgage for their parents, who felt it was the best choice for them and they have never looked back. In fact, one has since remortgaged their equity release plan as the value of their property has increased significantly since; another addition to the list of pros and cons of equity release schemes!
As an independent equity release adviser, I always recommend getting whole of market advice from a specialist broker like Equity Release Supermarket who is regulated by the Financial Conduct Authority & members of the Equity Release Council.