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Archive for October, 2012

Equity Release – The Only Way is Ethics

Sunday, October 21st, 2012

With news that equity release schemes are becoming more of a mainstream mortgage for the over 55’s, we look at how the equity release market is regulating the protection of its consumers.

 

We have all heard the stories of how equity release schemes are bad for you and the local gossip columnists berating the expense of these plans. However, the equity release industry has come a long way since the original equity release plans were offered in 1965 when the average house price was approximately £4,000!

 

Why was regulation introduced?

It was the earlier version of equity release schemes that started creating a stir. Back in 1988 a new type of plan was introduced called a ‘home income plan’. They relied on using two financial instruments – an annuity or investment bond to provide an income, which in turn paid an interest only mortgage that raised the initial capital. The annuity income would have been sufficient to not only pay the mortgage but also provide additional funds to supplement the applicant’s income.

 

In 1988, the principles of the scheme were sound. However, there was no account taken of how future interest rates may change after a years of economic stability. Therefore when interest rates rose steeply in 1990 and property prices fell significantly, there were unfortunate cases of people experiencing negative equity. Additionally, as a consequence of higher interest rates, the annuity income became insufficient to cover the monthly mortgage payments, thereby wiping out the residual personal income also. These home income plans were subsequently banned.

 

The launch of SHIP

Such disastrous events were the catalyst for greater regulation of these equity release type products and led to providers in this market forming a coalition. This was heralded as SHIP (Safe Home Income Plans) and was introduced in 1991 to protect the holders of such schemes and their beneficiaries.

 

Further bad news

However, the problems were not answered immediately. During the mid 1990’s we had certain banks – Barclays and Bank of Scotland introducing SAM’s (Shared Appreciation Mortgages). These schemes worked on the basis that the mortgagee released an amount of equity in return for a proportion of the house value. No monthly payments of interest were required. However, the banks took not just the current value, but also a percentage of the future value.

You may recall that the mid to late 1990’s house prices thereafter soared. The bias was obviously in the banks favour (no changes there) to the tune of approximately three to one in their favour in any property escalation.

These schemes were consequently withdrawn and we are still hearing stories in the news today about people who took out SAM’s & have no redress financially from the FSA.

 

Step forward the FSA

Sooner, rather than later the Financial Services Authority stepped in to regulate the market & by 2004 the Government had brought forth legislation protecting lifetime mortgage customers. The protection didn’t just stop with the schemes; financial advisers now came under the auspices of the FSA and had to meet certain criteria to be able to provide equity release advice.

The FSA then introduced the Financial Ombudsman Service and put the FSA Compensation scheme in place to recompense people who had been mis-sold. Previously, applicants only had the courts as protection and taking on the banks could prove an expensive exercise.

By 2007, Home Reversion schemes were also governed by the FSA leading to stricter controls on all types of equity release schemes.

 

By this time some of the major equity release companies such as Norwich Union (now Aviva) and Northern Rock had joined SHIP. Equity release schemes started going through innovation with drawdown equity release plans becoming popular and being released initially by Prudential, Just Retirement & Hodge Lifetime. With mixed attitudes towards beneficiary’s inheritance, we had the introduction of interest only lifetime mortgages from Stonehaven which allowed some, or all of the interest charged being paid off.

So, not only has the market emphasis changed towards regulation, but also the products themselves have seen massive changed in concept and design.

 

Further peace of mind – legals

So far we have talked about how the FSA has helped regulate the market and the equity release companies themselves designing better products, but what about the equity release process itself?

 

The legal aspects of equity release have now been indoctrinated within the SHIP rules. It is here that extra layers of protection have been provided by the equity release solicitors and provide the final checks of the equity application process. From checking the identity of the applicants, establishing genuine reasons for the raising of capital, particularly when gifting to family and ensuring legal title & conveyancing thereof, solicitors have an important role to play.

 

Under SHIP rules, two solicitors must be involved – one for the applicant & the second on behalf of the lender. This is to ensure there is no conflict of interest and protect both the lender & equity release customer. The applicant’s solicitor must also sign a SHIP certificate to state he is satisfied that all aspects of the equity release have been brought to their attention, implications & that the rules of ‘caveat emptor’ persist. Until the SHIP certificate is signed then no equity release application can complete.

 

SHIP update

Further rebranding of SHIP was felt necessary as the market grew and a louder voice was felt necessary for the equity release market as a whole. After much debate it was proposed that ‘The Equity Release Council’ would provide the new voice of the industry. SHIP has now moved on and hopefully the feeling and attitude to all things equity release. It has travelled much distance since 1965 and overcome some dark days along the way.

 

Nevertheless, this is a new dawn for the equity release industry. With greater trust, greater demand and greater product innovation still to come the future is looking bright for the protection of its customers.

 

If you are considering equity release and need assistance on receiving the best equity release advice call the team on 0800 678 5159.

 

New Life Mortgages Buck the Trend & Launch a New 25 Year Interest Only Retirement Mortgage for the over 65’s

Wednesday, October 10th, 2012

The tabloids are currently awash with articles proclaiming the death knell for the interest only mortgage. We only heard a few days ago the Nationwide are just one of the high street mortgage lenders in declaring themselves out of the interest only mortgage market.

 

But are these lenders missing a trick?

 

There is a potentially huge retirement mortgage market out there; a society that has grown up on a life of managing debt. They have paid off their mortgage, loans and credit cards during their lives which has created a culture of good financial management and has enabled them to build a significant volume of equity in their property.

 

Lenders need to understand more about the needs and demands of our retired population: –

  • Pensioners have fixed incomes which will usually be incremented each year
  • Most have a good credit history with track record to prove this
  • The older population tend to manage credit better & have not harnessed the ‘buy now, pay later’ mentality of today’s younger generation
  • They cannot be made redundant, nor lose income due to sickness or injury

 

We know in business, where one dares to tread another will be quick to follow and New Life Mortgages have done just that with their newly launched Over 65’s Retirement Mortgage.

 

Who are New Life Mortgages?

New Life Mortgages have been offering equity release schemes since 2003 and their innovative ideas were behind the first ever buy-to-let equity release plan and 2nd home lifetime mortgage schemes.

 

Having been assessing the market for their latest launch, New Life has evidenced the potential behind the vacuum left by the withdrawal of products such as the Halifax Retirement Home Plan in 2011.

 

The 65+ Retirement Mortgage

The newlife mortgages 65+ mortgage is aimed at homeowners with a minimum age of 65 who are looking to raise a tax free lump sum secured against their property and who wish to remain in situ for the foreseeable future. The important aspect of this plan is the term – there is no upper age limit and the applicants can take it out over a 25 year term, possibly longer with lender approval.

 

Available on an interest only or capital & repayment basis, the 65+ mortgage has an interest rate of 5.74% variable. Therefore, applying for a £50,000 mortgage on interest only basis would cost £239pm.

 

Early repayment charges (ERC’s) are favourable also which isn’t the norm on most equity release or interest only lifetime mortgage schemes. With a penalty of 3% in the first year only and none thereafter, the 65+ mortgage could certainly could suit those who are unable to sell their properties in the short term but still need cash funds.

 

How much will New Life Lend?

Standard mortgage lending criteria applies and affordability needs to be evidenced to determine how much can be borrowed. A common sense approach, and & possibly one that most lenders in the current environment could benefit from.

 

The formula for calculating maximum borrowings  are based on income of 4x the first income plus 2.5x the second, or simply 3.75x joint income, whichever provides the highest release for the client. Even still the loan must prove affordable when viewed in conjunction with other household expenditures. Usual credit checks are made and references requested if necessary.

 

The overall maximum amount that New Life Mortgages will lend is £350,000, although again this can be reviewed subject to individual criteria. One caveat though is that the maximum amount that can be borrowed is 50% of the property value & there must be £150,000 equity remaining after the mortgage is granted. Therefore, the over 65’s mortgage may not fit all criteria; however it is hopefully a move in the right direction for pensioner mortgages.

 

Finally

The 65+ mortgage is available on a purchase or remortgage basis. If remortgaging then New Life Mortgages are currently offering a FREE legal fees package on every application.

 

If you wish to check eligibility or request a quote on the New Life Mortgages 65+ Mortgage please call the Equity Release Supermarket team on 0800 678 5159.

How Long Does the Equity Release Application Process Take?

Sunday, October 7th, 2012

The equity release market is currently at its peak with a record number of applications. For those aged over 55 and are considering releasing equity, here we review how the equity release application process works, how long it takes and the involvement required.

 

The equity release sales process is now the most streamlined since the product was originally conceived. Increased competition in the marketplace from new providers has resulted in equity release companies looking at ways to steal an advantage. As better interest rates for customers are now also on offer and today’s equity release plans are much more flexible than those available until a few years ago, never has there been a better time to consider a release of equity for the over 55’s.

 

Timescales

An equity release application usually takes somewhere between 6 to 8 weeks for a lifetime mortgage scheme and 10 to 12 weeks for a home reversion plan, assuming the title on the house is clear. The actual amount of time your equity release process takes, also depends largely on how efficient and experienced your solicitor is. Applying for equity release involves legal paper work, which needs to be handled by a solicitor and solicitors with expertise in equity release plans can help to avoid any potential delays in your application.

 

The First Steps

The whole process starts with completion of an application form which must come in conjunction with financial advice as NO equity release provider will accept an application without it. At this stage any fees required which would be clearly stated in the Key Facts Illustration (KFI) would need to be paid. Normally this would include the valuation fee made payable to the lender. Some equity release brokers do charge an advice fee on application; however Equity Release Supermarket would only charge their advice fee upon completion, so beware of paying unnecessary upfront fees.

 

Valuation

On completion of the application form, it is then submitted to the equity release provider who will instruct a local surveyor to complete a basic valuation on the property. The role of this surveyor is to complete a report which will advise the current market value based on a relatively quick sale. The surveyor’s role will be to assess the local proximity to the property and establish similar properties and the price they had sold for within the last 3-6 months. Additionally, the surveyor will ascertain whether any essential repairs will be needed should the property have material defects that could affect the long term structure or re-saleability of the property.

 

Legalities

At the same time as application submission, for speed of completion it is wise for the legal process to get underway. Unless a client specifically requests to use their own family solicitor, we would recommend an equity release solicitor from ERSA (Equity release Solicitors Alliance). One of the former members of ERSA is Goldsmith Williams, whose organisation offers a fixed fee agreement with Equity Release Supermarket clients of £395 +VAT & disbursements. Additionally, these solicitors will provide a ‘no completion, no fee’ agreement with our clients which should be considered for any future lifetime mortgage or home reversion application.

 

The solicitor’s role

Two sets of solicitors must be in place to carry out the whole process. Under Equity Release Council (formerly SHIP) rules different solicitors must be employed on behalf of the client and the lender. Once instructed by the client or broker, the solicitor acting on behalf of the client will send out an initial questionnaire requesting further information. This will include a request for information on whether any mortgage exists currently, the owners to the title, any restrictions, further tenants or major improvements that have been carried out with respective planning permissions. This questionnaire also provides the permission for the prospective solicitor to act on their behalf.

 

What about existing mortgages or secured loans?

Should any existing charges by way of mortgages or secured loans be present on the title deeds then they must be removed prior to, or upon completion. Any mortgage will usually be settled by the proceeds from the equity release scheme at funds release stage. However, another role of the solicitor will be to establish exactly how much will be required on the proposed completion date. This will be achieved by requesting a redemption statement from the mortgagee, who will provide the current balance and the daily accrual rate of interest being added during the interim period to completion date.

 

Provider requirements

For an application to proceed through to completion, the lender will carry out certain checks to meet money laundering and the consumer credit act requirements. This will be proof of ID including passport, driving licence or government backed evidence such as your annual state pension letter or Inland Revenue tax code notification. Should none of these be available most lenders will also require a birth and/or marriage certificate as satisfactory proof of who you are. Additionally, proof of address will be required, so a recent utility bill or bank statement will be necessary.

 

Equity release and adverse credit

Some lenders will carry out credit checks. You may ask why this would be necessary as NO monthly payments are usually required with a lifetime mortgage scheme. The lenders view is that if someone has been negligent with previous credit payments, then there may be a tendency to not look after their property, thus affecting the lenders security.

 

Nevertheless, there would have to be severe credit problems for a lender to decline an equity release application due to adverse credit. Most lenders will accept previously missed payments, defaults and even CCJ’s (County Court Judgements) on their credit file, unless they are significantly large. Even then, most lenders such as Stonehaven will accept the application as long as the applicant has been forthcoming with an explanation as to why the CCJ’s had been applied. Undischarged bankrupts would usually be unsuccessful with any equity release borrowings.

 

Latter stages

Upon successful valuation and title checks, the solicitor acting on behalf of the client will set the completion date. Once your equity release scheme has gone through, you can receive the money by having it paid directly into your nominated bank account, or if you wish to save the telegraphic transfer fee (approximately £30), you can receive the funds in the form of a cheque. Depending on the particular scheme, money can be borrowed either as a one-off capital lump sum or by taking ad hoc withdrawals from a cash reserve set up from the outset.

 

An equity release plan can be a great way to turn the equity tied up within your estate into something tangible and usable. But like any large loan, it has its own risks. Therefore, before you decide to release equity from your home, make sure you speak to your solicitor or independent financial adviser first.

 

Companies such as Equity Release Supermarket provide the ‘complete equity release service’ whereby we provide guidance to clients from the start to finish of the application process. If you have any questions with regards to the equity release application process please call 0800 678 5159 where a qualified adviser can discuss your requirements.

 

 
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