This month’s Advocate column asked whether equity release was a viable part of planning for retirement income. Mike Richards of Mortgage Concepts Associates argued yes, but Hargreaves Lansdown’s Mark Dampier took the opposite side. It’s fair to say that reader Simon Chalk was not taken with Mr Dampier’s argument. We publish his response here:
“I thought it was a nicely balanced commentary from Mike Richards, with a good understanding of when and where equity release can work well. I would add that several providers will accept professional live- in carers. However, if they are family members then an occupancy waiver will usually be required.
What a shame I cannot say the same about Mark Dampier’s comments. I can only imagine his role as ‘Head of Research’ does not extend to equity release, or if it does then it must be about 25 years since he last ran his rule over the market. Several of his remarks demonstrate a lack of understanding of modern equity release plans, whilst others are simply entrenched, misguided views that must be challenged so that readers aren’t given the wrong information.
Let’s start with his use of the word ‘expensive’, which he uses without making a meaningful comparison. Expensive to whom and compared to what? The most popular form of plan is a rolled-up interest lifetime mortgage, meaning that the customer has no ‘expense’ to bear during their lifetime. If you know of any other financial product that provides a cash sum without immediately requiring regular repayments, please enlighten me. Now, I’ve heard some argue that it is expensive for the beneficiaries who may receive a reduced inheritance. But as they only get a single bean when the living have finished using it, that is a hypothetical argument.
Now, let’s pick on the interest rate issue. Considering that lifetime mortgages are impacted by movements in gilts pricing and are structured to run for an unknown term, which can end up being anything from 10 to 40 years or more, you cannot make a comparison with short-term interest rates. Add in the cost of providing a ‘no-negative equity guarantee’ (unique to lifetime mortgages) and the fact that the lender doesn’t see a single penny in servicing the interest, let alone return on capital over the term of the loan, then you begin to understand why pricing is different. If increasing debt is of concern, then (subject to affordability) some providers will allow interest to be serviced in full or in part whilst others permit up to 10 per cent per annum capital repayments.
Moneyfacts research for the Equity Release Council’s recently published Autumn Market Report reveals that the average fixed interest rate for life at 6.39 per cent is significantly lower than other forms of borrowing, such as personal loans, credit cards and overdrafts. Only short-term fixed-rates on ordinary mortgages come in lower, but then again the prospects of being able to secure such a thing in your retired years is nigh on nil. Government data shows the average female life expectancy (beyond 65) is 86, meaning the typical equity release customer, aged 70, might expect to hold their loan for around 16 years. Releasing £63,741 at an interest rate of 6.39 per cent from a property worth £271,293 would leave £207,552 of equity in their home at the outset.
Government data also shows the average female life expectancy is 86, meaning the typical equity release customer (aged 70) might expect to hold their loan for around 16 years. Releasing £63,741 at an interest rate of 6.39 per cent from a property worth £271,293 would leave £207,552 of equity in their home at the outset.
The Equity Release Council’s analysis shows that even with below-average house price growth of 2 per cent annually, it is not until year 14 that the remaining equity dips below £207,552 once the loan and interest are deducted. By year 16, 2 per cent annual house price growth, 37 per cent in total over 16 years, would leave £200,703 of equity after repaying the loan and interest - more than 96 per cent of the original sum.
Mark misses the point when it comes to why people don’t downsize. It’s because they don’t want to and why the heck should they, just so that the kids can be better off than them? Even then many customers releasing equity have already downsized and have nowhere else to move to that is practical or appealing. People choosing to add value to their homes is one of the most popular uses for equity release with a resulting increased valuation typically negating any costs incurred. Besides, why shouldn’t they make their home more enjoyable to live in?
Next, I’ll turn to the notion of releasing £100,000 to invest in interest generating savings. No adviser I know would ever suggest that customers incur a plus 6 per cent interest rate charge on borrowing, only to deposit money that attracts a much lower rate of interest. Clearly it doesn’t make sound financial sense, which is why those wanting a form of regular ‘income’ opt for a flexible drawdown plan, taking only what and when they need. I am sure Mark would advocate such a strategy. Interestingly it can be a way of ensuring that those entitled to means-tested benefits remain entitled.
Last of all, ‘unexpected’ penalties do not exist. Customers know full well what penalties, if any, they may face in repaying their plan prematurely as they are clearly spelled out in a quote and written report before they apply, and again in the subsequent mortgage offer, and for good measure their own independent solicitor does so one more time at a face-to-face meeting prior to completion. Any person who can pass those three stages clearly knows exactly what they are entering into. It’s worth mentioning that some providers waive penalties on downsizing, or permit 10 per cent capital repayment each year without charge. Do you encourage or indeed insist that your customers take independent legal advice before they buy a guaranteed investment loaded with early settlement clauses?
I’m sorry for lambasting every single comment Mark has made here, but I really do feel he needs to open your mind a little and perhaps spend some time revisiting equity release. The fact is that life moves on and attitudes change. Actually enjoying what you have amassed in wealth is now considered to be a healthy thing to do.”
Simon Chalk is technical manager, equity release at Age Partnership.
