What is it and why could it be of value to us? We find out more from Nigel Waterson who is the Chairman of the Equity Release Council.
1. What are the two types of equity release and how do they work?
Equity Release provides home-owners over the age of 55 with the facility to release money from their home, which they live in as their main residence without necessarily having to make any regular repayments. There are two main types of equity release: Lifetime Mortgages and Home Reversion plans. Both types of plan are regulated by the Financial Conduct Authority (FCA). By using an equity release product, a home owner can draw a lump sum or regular smaller sums from the value of their home, while continuing to remain living in it. Equity release customers benefit from three levels of protection: a structured financial advice process, face-to-face legal advice and product safeguards.
A Lifetime Mortgage is a type of mortgage where you can choose to extract your funds in a single lump sum or in smaller amounts over time up to the maximum limit agreed with the plan provider. You can also elect to retain some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children.
You retain full ownership of your home and interest on the loan is usually rolled up (compounded). The loan and the rolled up interest is repaid by your estate when you either die or move to permanent residential care. If you are part of a couple, the repayment is not made until the last remaining person living in the home either dies or moves into long term care. That means that both you and your partner are free to live in your home for the rest of your lives.
However, with some plans you can make monthly interest repayments in part, or in full. This arrangement would enable you to maintain the debt to the initial capital before interest. If you choose to make interest repayments, you still have the option to move to a roll up arrangement at a later date if you wish, but always discuss details with your plan provider. How much can be released is dependent on your age and the value of your property. Some providers may offer larger sums to those with certain past or present medical conditions, or even ‘lifestyle factors’ such as a smoking habit.
Home Reversion Plan
A Home Reversion Plan also allows you to access all or part of the value of your property while retaining the right to remain in it. With Home Reversion, the provider will purchase all or a part percentage of your house. Again, depending on your age and medical conditions, you may be able to access more funds. You will be provided with a tax free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life. There is no day to day interference and no restrictions in treating the house exactly as before; as a private home to live in freely.
The percentage you retain in your property will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership. With a home reversion plan you know precisely what portion of your property you have parted with and, equally, what has been ring fenced for later use, possibly to leave in a Will.
2. With people living longer this must affect the amount of equity that providers are prepared to release – is there an industry standard scale and how do we know that we are getting the best value for what is the biggest investment most people will ever make?
Equity release is not a solution for everyone, however those customers that choose to take out an equity release loan do get the best value. More specifically, with rising house prices, the typical value of equity released is equivalent to less than a quarter of the average housing wealth of equity release customers. National indices show the average house price growth over 16 years exceeds 260% and has never dropped below 110%. Given the above, typical house price growth can be seen to balance the effects of compounding interest. For instance, total house price growth of 40% over a 16 year period for a typical customer would preserve their remaining equity while below average growth of 68% would ensure it retains its value in line with 2% annual consumer price inflation.
In addition, equity release products sold by members of the Council also have a no negative equity guarantee, meaning that if there is any shortfall between the amount raised from the sale of the property and the amount still owed, the provider cannot seek repayment of that shortfall.
The Council has put these standards in place to protect and safeguard consumers, who may be at a difficult time in their life when looking to take out an equity release policy and who are not used to dealing with such substantial sums of money.
3. Most people will want to know how the amount that they take, either a as lump sum or in regular payments, will affect their tax position, their entitlement to means tested benefits and their ability to move or sell the property. These are all vital and complicated matters, how do your member keep up with the regulations and ensure that advice given is the most appropriate for the individual?
The Council requires equity release transactions to be supported by independent, expert financial advice. Advisers will be either directly authorised by the FCA, or Appointed Representatives of a firm that is; either way they will receive regulatory updates regarding advice issues. More specifically for equity release advisers, the Equity Release Council’s own 13 point ‘checklist for advisers’ requires them to discuss these issues with the client and in particular give consideration to how their position may be affected by releasing equity. Lastly, The Council of course runs regular meetings for members where relevant topics are aired.
4. And finally is there any legislation/policy not currently in force that the Equity Release Council would like to see?
Confirmation from the Pensions Minister that housing wealth will be among the assets considered within the new ‘Guidance Guarantee’ has certainly been another significant milestone for potential equity release customers. More specifically, it is a real boost for the 320,000 people who retire each year: many of whom are homeowners and will benefit from thinking at an early stage how their housing wealth could bring them financial security in retirement. It is vital that the guidance guarantee conversations make people aware of each and every source of wealth they can call on in retirement so no-one is left to struggle needlessly. For many, unlocking their property wealth may be the most viable and appropriate course of action. So, the introduction of this possibility through the guidance guarantee is a step in the right direction to ensure consumers’ final decision is suited to their individual circumstances.
In terms of departmental ownership, this is definitely on the wish list as currently a number of government departments – HM Treasury, the Department for Work and Pensions, the Department for Communities and Local Government and the Department of Health – are responsible for policy areas which impact on equity release. A government department championing equity release would provide the opportunity to ensure that those implementing policy changes have considered the impact on equity release, helping to avoid unforeseen consequences for the industry, government and first and foremost for the consumers. It would also allow the sharing of insight as to where equity release could be used to help fulfil policy aims such as increasing retirement income or paying for social care.