Equity Release is becoming an important part of financial planning for many homeowners. But the memory of poor value products from over 10 years ago still remains, causing a great deal of scepticism and misunderstanding about what Equity Release really is.
The industry has seen dramatic change over recent years, with the introduction of new features, greater flexibility, new standards from the trade body, and reductions in cost. Older homeowners have more product choice, and better protection, than ever before. Indeed, products are now entering the mainstream financial planning conversation, helping with home improvements, tax planning, supplementing income and helping family members.
So, what can be done to dispel the myths once and for all?
David Forsdyke, Partner and head of our Later Life Finance team, answers some of the most common concerns.
Equity Release is arguably one of the safest products in Financial Services. The FCA has in place a set of rules specifically for the sale of Equity Release. You cannot buy direct as products are only available through advisers who have permission from the FCA to recommend Equity Release products. Advisers must hold a separate industry qualification, and must take you through a number of considerations before making any recommendation. In addition, the trade body, the Equity Release Council, have a strict set of rules and standards in place which members, including all providers, must adhere to.
It may be that Equity Release is not the right solution for you, but a different form of finance is. One of our strengths at Knight Frank Finance is that we have access to the broadest range of property finance, which ensures we find the most appropriate solution for your needs and circumstances.
Equity Release products are being applied effectively and efficiently in a growing number of scenarios. For example, wealthier homeowners who want to top up their income, make improvements to their home, or help family members with a financial gift, are turning to Equity Release products because of their flexibility and low cost. Financial Planners are talking to us about using property wealth to help their clients retire early, reduce their Inheritance Tax liabilities*, or assist with grandchildren’s school fees planning. The conversation about the benefits of Equity Release is entering the mainstream and is certainly no longer seen as a ‘last resort’.
- Will I lose control of my home or be forced to move out?
Under the Equity Release Council’s product standards you have the right to remain in your property for the rest of your life, or until you need to move out into long term care. With a lifetime mortgage (the most common form of Equity Release) you still own your home, the property title is still in your name, and you can continue to make changes to your property as you wish. As with any type of mortgage, it’s important you look after your home and tell your lender if you plan to make any major changes. If you take out the less common form of Equity Release, known as Home Reversion, you will give up ownership of some or all of your property, but the provider has to give you a tenancy for the rest of your life (or until you move out permanently into care) which means they cannot throw you out.
- If I take out Equity Release, there won’t be anything left for my children and I could leave a debt behind
The good news is that lifetime mortgages all have a ‘no negative equity guarantee’ so you can never owe more than the value of the property. Interest rates are at historically low levels, so the effect of compounding interest (‘roll-up’) is greatly reduced. For example, a lifetime mortgage taken at a rate below 4% will take around 24 years to double in size. If property prices continue to rise at 1% each year and you borrowed 25% of your property’s value at the outset, your remaining equity would actually keep increasing. We would need to see property prices falling by over 3% each year over the next 20 years before you run out of equity.
- Will compounding interest mean I have a really big debt in the future?
First of all you don’t have to let the interest compound, or ‘roll up’ on top of the loan if you don’t want to. You can choose to pay some or all of the interest each month, or you could repay some of the money you’ve borrowed whenever you have some surplus funds. All products allow you to repay at least 10% of your loan each year without any additional charges or penalties. If you do allow the interest to roll up on top of the loan then it will double in size in 18 years at 4%, or 15 years at 5%.
David Forsdyke has 25 years' experience in financial services, including six years with the industry regulator (the Financial Conduct Authority) and two years as a member of the Equity Release Council’s Standards Board. If you would like to know more about Equity Release, speak to David or a member of our Later Life Finance team. All Later Life advisers are qualified in Equity Release and will take the time to explain how everything works. You can contact us on 01483 947764 or visit our Borrowing Into Retirement pages.
*Knight Frank Finance do not give pensions or tax advice, but will work closely with our clients’ trusted advisers.