Equity release is big business for lenders in 2019. It accounts for over half of all activity in the UK home loans market and its popularity is continuing to grow. But it's been associated with some financial horror stories in the past, so is it a safe or sensible option? To find out, we put our questions to Wayne Musker, an independent financial adviser at the Chester based practice, Financial Fortress.
Q. So Wayne, let's start with the most obvious question: what actually is equity release?
Equity release is essentially a way of freeing up some of the value locked away in your home. Through a deal with a lender, you can release a single lump sum or you can draw down a series of smaller ones, depending on what you agree. However, it's important to note that this is effectively a loan, so interest is payable on whatever cash you release.
There are different ways of doing it, but the most common is to take out what amounts to a new mortgage on your property. You can do this even if you haven't yet paid off the full value of your original mortgage.
The big difference between this and a conventional mortgage is that you don't have to pay off the interest while you live. Interest is only payable after your death or if you move out of your home and into care premises. For this reason, you will sometimes hear equity release products being referred to as 'lifetime mortgages.'
Q. And what sort of people are making use of them?
Equity release is only available to people aged 55 or over, and some lenders have policies that they will only sell to the over 60s. The age bands vary by product but it's generally true that equity release is an option for older people, and it can be used for a variety of purposes.
Some people (and this is quite common) use equity release to help their children financially, such as by helping them to put down deposits on their own new houses. Others use it to pay for luxuries in retirement, and others still might be forced to use it just to fund their daily living costs - usually because their pensions are inadequate and they've exhausted all their savings.
It's a growing trend, mainly because we have an ageing population and because people are remaining more active in later life. They want to do more but they need money to do it, so if they have little free cash but lots of value tied up in their home, many will see it as an attractive option.
Q. What advice do you have for people who might be considering it?
I think it's important to be very careful. Equity release works for some people in some circumstances but it's vital that they go into it understanding how it all works and what the consequences will be.
As a way of releasing cash, it can be expensive. Interest rates on equity release products are normally much higher than on conventional mortgages - perhaps up to twice as much on some lenders' products. While it's true that the person releasing the cash doesn't have to pay the interest during their lifetime, they must understand that the interest will keep mounting up. It's calculated on a compound basis, so the longer you live, the more it will add up and the more it will erode the value of whatever you eventually pass on to your inheritors.
This is perhaps why equity release developed some negative associations in previous years. Sometimes, customers were being 'advised' by sales people rather than properly qualified independent financial advisers; policies were being sold in a much less regulated market, and they weren't always appropriate for the people buying them. In short, poor advice meant that many individuals made poor choices. You see examples now, where people genuinely didn't seem to realise that equity release would mean leaving less for their children to inherit. It sometimes came as a terrible shock to family members.
So one piece of advice for anyone looking to gain some cash liquidity would be to consider whether there are better options for doing that, particularly if you have loved ones and want to leave them as much as you possibly can.
Q. What other options are available?
One of the best might be to consider downsizing. If you own your home but it's bigger than you actually need, then you could sell it and move to a smaller, cheaper property. That would certainly be an effective way of freeing some of the value tied up in your bricks and mortar. But importantly, you'd still end up owning your own home. You'd gain the full value of any capital appreciation in your new, smaller home, and you wouldn't be paying a penny in added interest.
If that isn't an option, then you could consider renting out a room to generate an added income. Some people won't want to do that because they value their privacy, but it's an easy and immediate way to generate extra cash.
Failing all that, it might be worth looking at any other savings or investments you own to see whether these alone could help you achieve whatever it is you want to achieve. It's always going to be a good idea to evaluate all your other options first.
Q. So is it fair to think of equity release as a kind of 'last resort'?
It probably is, yes, but that's potentially misleading; equity release can still be a perfectly viable option for certain types of people. There is nothing intrinsically wrong with equity release so long as people understand exactly what it means; that the debt erodes their share of their own house and that the debt will usually get bigger over time.
Q. You said 'usually.' Doesn't the debit inevitably get bigger over time because of the interest?
Not always. With some policies you can agree to service the interest payments so that the debt doesn't get any bigger. That's an option if, for example, you have a steady source of income that can cover the interest payments.
It might also be appropriate for someone who wants to use the cash lump sum to put a deposit on a buy-to-let property in the expectation that the monthly rental income would then cover the interest payments. That would be an unusual example but it could work perfectly well, subject to getting appropriate financial advice. Realistically, that would only be an option we'd ever discuss with a customer who was already quite financially sophisticated - perhaps someone who already knew the property market and had an existing portfolio. I don't think we'd propose that sort of route to a property novice.
Q. In what sort of circumstances would equity release work best?
That's really difficult to say because different equity release products have different terms and characteristics. It really is a matter of matching the right product to the right set of circumstances. Equity release isn't a cheap way to get hold of money, but if you have a sound strategy for using that money, it can be worth exploring. For example, some people might want to release money to invest in stocks, shares and other assets. If you're confident that your investment returns will more than cover the interest payments, then it could be worth doing.
Q. What are the costs of an equity release deal?
Again, they vary, so it's always sensible to seek advice and to shop around. Usually, you can expect to pay for the advice you receive from an independent financial adviser and, if you subsequently take out a plan, you'll also be paying an administration fee to the lender. The lending fee will be fixed and may be in the region of £2,000 to £3,000 depending on the provider.
Aside from the equity release plan itself, there may also be fees payable to solicitors for conveyancing, and to an engineer for a building survey.
On top of that, you will be incurring interest on your lump sum. Interest rates might be a couple of percentage points higher than you'd find with ordinary mortgages.
Q. Looking around, interestrates seem to vary between about 3.5% and 5%. Does that sound about right?
Price competition has been rising in the last couple of years, with more products and lower rates on offer, so you can now find rates as low as 3% or 3.5%. But it isn't really helpful to point to particular rates and products because so much depends on the individual's circumstances and the specific terms of each deal. That's taking you into complex and financially dangerous territory, and it's much too simplistic to judge the suitability of a product on the 'headline' rate alone.
Q. Okay, but is there anything you should look for as sign of a better, safer deal?
This is the sort of discussion where it gets very difficult to generalise. Everybody's needs and circumstances are different and so it really demands a proper, individual discussion with an independent financial adviser. That's one of the things I'm most keen to stress here: equity release is a complicated subject and it's absolutely essential that if people go into it, they know exactly what they're committing to. Part of that means understanding how a given deal meets your own needs.
However, if you have taken good advice and you're narrowing down your options, then we'd always recommend that you go for a product that is badged with the Equity Release Council standard. This means that the product comes with certain guarantees and restrictions to protect the consumer. One of the most important of these is the fact that the value of the debt can never exceed the total value of your property; in other words, you won't find yourself in negative equity and you'll never be forced to sell, no matter how long you live.
Similarly, ERC branding should also mean that you'll either be paying a fixed interest rate or a capped variable rate. That means the debt shouldn't start to run away too quickly.
Also, make sure that your chosen deal gives you a clear right to remain. That will allow you to live in your property for your lifetime, provided that it's your main residence and that you keep it in reasonable condition. Likewise, make sure you have the right to move (i.e. to downsize) if you want to. If you do that, the lender should be prepared to adjust the terms of the deal to account for the difference in value.
Q. Thanks Wayne. Any final thoughts to summarise all this?
The best way to think about equity release is that it's a debt. You don't repay it yourself, but your inheritors do - because it's taken out of the value of your estate. Compound interest can increase very quickly, so it can ultimately be a very expensive way of raising cash. As a rule of thumb, you can expect that any equity release debt will tend to double every ten years. With that in mind, it's well worth thinking whether you might have other options. Equity release is very popular and it can be a sensible move for some people, but that doesn't necessarily mean that it's right for you.
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Financial Fortress Ltd is authorised and regulated by the Financial Conduct Authority. Visit www.financialfortress.co.uk for more details.