MortgagesJun 9 2014

Equity release: What is available, and who is it for?

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There is no doubt that equity release products no longer leave vulnerable customers exposed to the threat of negative equity as they once did; not only are they now fully regulated, but the Equity Release Council sets standards focused on consumer protection.

However, according to Dean Mirfin, group director of Key Retirement Solutions, the industry still suffers due to its history despite 10 years of regulation and in spite of the fact products available today “are completely different to their predecessors and offer much greater security to consumers”.

Andrew Tully, pensions technical director at MGM Advantage, agrees, adding: “Many years ago, equity release schemes had a rather dubious reputation, however the reality today is different.

“Equity release products became regulated by the Financial Conduct Authority in 2004. In addition, the industry body, the Equity Release Council, focuses on protecting consumers.”

Vanessa Owen, LV’s head of annuities and equity release, echoes the sentiments and says clients who opt for product from a member of the Equity Release Council are provided with several safeguards and guarantees, “for example they will never owe more than their house is worth and will be allowed to remain in their property for life”.

One of the key developments in the equity release sector was the introduction of products which allow monthly interest payments to be made, according to Mr Tully.

He says: “This means people have more choice in how they manage a lifetime mortgage, and means people are able to stop, or dramatically reduce, the interest building up on the loan amount.”

But beyond the positive sentiment expressed by those across the sector, what propositions are now open for prospective borrowers?

Home reversion

The purpose of equity release is to allow people to release some of the cash stored up in their most valuable asset, their home, without the need to move, but there are different ways this can be accessed.

Broadly, equity release products fall into two types with a few nuanced variances: ‘home reversion’ plans and lifetime mortgages Both are fully regulated by the Financial Conduct Authority.

With a home reversion plan, the reversion provider buys a percentage or all of the property once the client has determined the level of cash required.

Chris Prior, manager of sales and distribution at Bridgewater Equity Release, explains: “The percentage of the property not used would then be guaranteed in the event of death to go to the beneficiaries and during the lifetime of the plan the client does not make any payments and there is no accruing interest.

“The client knows the equity that has been used as a percentage of the property and also what percentage will remain for the beneficiaries. The percentage remaining will be that of the property value at the time of death.”

However, KRS’s Mr Mirfin warns that the amount paid is discounted depending on age and life expectancy. A discounted price of 30 to 60 per cent of true value is a “typical scale”, he adds.

As it depends on age, home reversion may, for some clients “offer larger sums especially at younger ages than lifetime mortgages, although in recently years the demand for reversion has fallen as lifetime mortgages offer similar terms”, Mr Mirfin states.

Lifetime mortgage

A lifetime mortgage works differently to a home reversion plan as it is a loan that is secured on the property, with the consumer maintaining full ownership. A benefit to this kind of loan in contrast to alternative mortgages is that in most cases they do not require any repayments until the property is sold, LV’s Ms Owen says.

According to KRS’s Mr Mirfin, there are three strands of lifetime mortgage types: drawdown, best suited to those who wish to use funds over time rather than all at once; single advance, used for one-off purchases; and enhanced, which offers “greater levels of borrowing for those with health and lifestyle conditions”.

Ms Owen adds: “The features that equity release providers offer vary and it is important that clients are aware of that as this will influence the choice they make. If a client knows they will want to take out a certain amount of capital over time, it is worth checking to see whether the provider offers a guaranteed drawdown facility.

“This provides advisers with certainty that their clients will be able to access the agreed amount in future years. Advisers will also need to take into account the property that their clients wants to unlock capital from as not all providers will consider lending on second homes or holiday homes.”

Is it for everyone?

It seems equity release providers all have different criteria for who can access the products. According to Bridgewater’s Mr Prior, these products are for over 55s and LV says they are for those over 60 years of age.

Ms Owen adds that those clients with mortgages ending before 2020 are “more likely to be eligible” for equity release because, as a result of rising property prices during the last 30 years “these homeowners are most likely to have built up a significant amount of equity within their property”.

The reasons why people access equity release has also changed over the last 30 years, Ms Owen says.

She says: “Previously equity release was typically taken out by retirees who want to fund the retirement of their dreams and used the money to pay for cruises and holidays, but we are seeing a rise in the number of people taking out equity release to cover a shortfall in their pension, pay off debt and to pay for unexpected costs they can’t fund such as home repairs.”

Clearly it depends what needs a client has as to what product is best for them. A recent Cass Business School research paper revealed that 31 per cent of women and 25 per cent of men who reach 65 will go into care at some point in their lives and having equity release as an option to fund this would clearly take the pressure off.

However, providers also hint that equity release in general should be used as a last resort and discussions should include all the family as it can impact on inheritance and also younger generations may not be pleased to see the family home go.

MGM’s Mr Tully warns that people should consider other options first, such as downsizing their property or using savings to raise the cash required. Mr Tully also adds that as releasing equity can affect the inheritance passed onto the family, “it is worthwhile talking to other family members before deciding to proceed”.

He also warned that equity release may impact on means-tested state benefits, “so I people are receiving benefits or may do so in the future, this should be considered”.

This makes it more important than ever to take regulated financial advice when considering equity release.