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Archive for December, 2012

When Equity Release is NOT Right For You!

Sunday, December 30th, 2012

This article looks at why a release of equity from your home may NOT be in your best interests, after all Equity Release Supermarket is an impartial website and we only want what is best for our customers. Whether that is to proceed, delay and consider the alternatives or to dismiss outright, we will always provide you with a decision that is in YOUR best interests.

 

Equity release schemes are becoming a popular solution for homeowners aged over 55 who want to raise cash without having to sell their property. Although the safeties of equity release schemes are now assured by regulation, the decision to take equity from your property may still not be in your best interests.

 

Start of the equity release planning process

While there are different types of equity release schemes such as Lifetime Mortgages, Home Reversion and Interest Only Lifetime Mortgages, essentially they all act as a vehicle to release some of the equity that is built into your property, and you only need to repay it only once the house is eventually sold.

 

This is all well and good, however you should never shoe horn an equity release plan to fit your personal needs. In fact the opposite should be the case. Any equity release plan should be designed to meet your own personal goals & circumstances. If they don’t, then look towards the alternatives.

 

The fact that you are considering releasing equity means you have a need for financial planning and require funds to meet your monetary objectives. There is nothing wrong with that. Throughout our adult lives, circumstances will dictate that some form of finance will be required, whether it’s a mortgage, loan, overdraft or the credit card. As long as the finance selected was the right product for the right reasons, then it should prove the correct decision to make.

 

This premise remains the same even throughout retirement. The needs of the baby boomer generation are now proving more expansive than previous retired generations. With long term health improving & the over 60’s having a more active lifestyle, retirees have a flavour of living a more care free life and fulfilling their ambitions and dreams. However, jumping to the conclusion that an equity release loan is the only answer, may prove to be a mistake.

 

When should equity release be a ‘NO’

For every reason why one should take a release of equity, there are as many reasons also why not to.  Here we look at the reasons and alternatives why you should think twice about taking out an equity release mortgage, be it a home reversion or one of the many lifetime mortgages.

 

1.      Age – equity release schemes are not available until the youngest homeowner is 55 years attained. There are instances whereby one person may 55+ and their partner is younger. Under these circumstances it is still possible to take a lifetime mortgage only, however this should really be only under exceptional circumstances such as poor health or the management of serious debt issues (maybe to avoid bankruptcy or house repossession). The age factor is an important principle behind one of the negative issues surrounding the equity release loan – compounding of the interest. Remember, the younger you are when releasing equity from your property, the more time the capital has to compound on a yearly basis.

 

The consequential effect of a longer term is that the final balance will be larger; resulting in more of the proceeds from the eventual sale of the property needing to be paid back to the lender. Bear in mind this will not be paid back by you, you won’t be around, unless the lifetime mortgage is being repaid due to moving into a residential care home! It will effectively be paid back by your children/beneficiaries.

 

NOTE -the resultant effect of a longer compounding interest charging period is that the final balance being much higher and a correspondingly much lower inheritance for your children/beneficiaries. If this is something that concerns you, request an equity release quote and see what the potential balance could be in the future. Making certain assumptions on future property values and your anticipated life expectancy would provide an estimate of how much equity could be left, if any at all. Should this be prohibitive, then a solution, if right for your circumstances would be to delay you decision for a few years until such a time the roll-up effect hasn’t as greater an effect.

 

2.      Consider possible alternatives – equity release should really be considered a ‘last resort’ once all the alternative forms of finance have been eliminated. The reason for this statement is due to the long term cost of these schemes, whereas some of the alternatives, if affordable could be more reasonable and favourable for your children or beneficiaries. As part of the Equity Release Supermarket advice service all our advisers will consider whether any alternative forms of raising finance would be better for you. These could include the following: –

 

  • Interest only or interest only lifetime mortgage – if you can comfortably afford to make repayments during retirement then look at such schemes. Interest only or interest only lifetime mortgages would be better for your children as there is NO compounding of interest. The balance would remain the same throughout the term as when the mortgage started. Therefore, the final balance will be known in advance and any inheritance can be ascertained using assumptions on future property prices. With the minimum equity release loan available being £10,000, alternative loan types maybe better. Could a personal loan or credit card be used to service the debt? Certainly options to consider that would also clear the debt, rather than it increasing like an equity release loan.

 

 

  • Downsizing – dependent upon the size of your current property and its uses, then moving to a smaller property could be a solution. By downsizing to a lower valued property would raise money that could then fund your financial objectives. If nothing else, it could delay the decision to take equity release for many years. This is an important decision and not to be taken lightly. There are costs involved in moving house – stamp duty, legal fees etc and there will undoubtedly be improvements you wish to make to your new property which will also include additional costs. Moving to a new area will also mean new neighbours, facilities such as shops, doctors etc should always be considered as part of the downsizing process.
  • Check for means tested benefits – Before taking any form of additional finance in retirement, it would be prudent to check whether you have any entitlement to means tested benefits. This could include state benefits such as pension credit, savings credit or even council tax benefit. Therefore, always check with the Pensions Office or your local council to establish whether you could claim further income for the state. This would only relate to lower income issues and should your income fall below the thresholds set by the authorities then you may have some entitlement. Having this extra income may solve or temporarily solve the need for equity release. If you are entitled to means tested benefits it would also be sensible to check whether any home improvement grants are available on your property. This could be even if you are planning home improvements or not. You may be eligible for loft insulation, cavity wall insulation or boiler replacement under some local authorities.
    NOTE – if you still pursue a release of equity and you are drawing state benefits, the equity release lump sum could result in a partial or total reduction in means tested benefits. If you wish to check your eligibility for means tested benefits you can check with you local equity release adviser on 0800 678 5159.
  • Use existing savings/family bequests – if you have savings or investments that are not used for income purposes then you should consider using these funds before taking equity from your property. Bear in mind that taking equity from your property and merely leaving it languishing in a bank account is not best advice. In today’s interest rate world you will not receive a better interest rate on a bank account than the interest being charged on an equity release scheme.  Therefore, use any savings or liquid investments first, but bear in mind that an emergency fund of upto £10,000 is also prudent to have for that rainy day. This decision is always down to the individual as some clients feel more comfortable leaving greater sums on deposit, just in case. There is also no shame in asking family members for financial support, particularly when the decision to take equity release may not be to their approval due to the effect on their inheritance! Should a family member wish to fund your loan then this may be more cost effective for them, but this could boil down to whether they are happy tying up these monies longer term when they may have their own family needs in the near future.

 

Evidently, there are many factors and solutions that can affect the eventual decision as to whether equity release is right for you. For that reason it is imperative to speak to a financial adviser who is trained & qualified in equity release solutions.

 

To speak to your local equity release adviser click here or call Freephone 0800 678 5159 where independent advice is available.

 

Do Banks Offer Equity Release Schemes?

Tuesday, December 11th, 2012

It has been a mystery why the UK mainstream banks haven’t fully embraced their traditional image of lenders to the masses, by entering into the realm of equity release schemes. We look at the history of attempts and corresponding results of many high street banks who have previously offered equity release schemes to the over 55’s.

 

Problems from the start

We start our history lesson back in the 1990’s, when Barclays & Bank of Scotland dreamt up the concept of the Shared Appreciation Mortgage (SAMs) whilst the housing market was quite stagnant. People were looking desperately to get on the housing ladder and it seemed a good buyers market.

 

These two banks were offering the elderly a mortgage with NO monthly payments; however they would instead take a share in the future rise in the property value. Around 11,000 Shared Appreciation Mortgages were sold of which these unlucky retirees thought would only need to pay back a few thousand pounds.

 

However, the property boom followed the property slump of the 1990’s, and by 2007 property values had almost quadrupled of which the banks also took their large share. The resultant effect has left many pensioners now unable to sell as they haven’t sufficient equity of their own to move house. The legacy of these schemes still exists today with legal action being taken by some of the unfortunate customers of these banks.

 

Some have tried and failed

We have seen in the last decade a couple more banks have dipped their toes into the water & failed with lifetime mortgage schemes. Notably one temporary success was NatWest/Royal Bank of Scotland who ventured into lifetime mortgages for a period, but none have ever felt comfortable offering this form of mortgage for the over 55’s.

 

NatWest/RBS equity release schemes became available in 2006 and were made available to its long time bank customers or retired bank staff. However, by 2009 after much back office investment & a surge in recruitment RBS ran out of funds and closed the whole equity release operation down.

 

The importance of independence

In Retirement Services logoHSBC offered equity release back in 2006, after tying itself up with a tender from the now dissolved equity release company – In Retirement Services. In Retirement Services were an equity release provider in their own right and funded by private equity firm 3i, but only offered their own products.

This was always considered a strange decision for HSBC at the time to tie themselves with a non-independent equity release company & left the markets bemused. Afterall, why would a major high street bank tie themselves to someone with no independence for its customers?

The relationship ceased and the products were no longer available once In retirement Services went into administration due to funding issues in 2009.

 

Have Building Societies fared any better?

There has been a history of building societies that have yielded greater success with their own equity release solutions. They have ventured in & out of the market but no building society has remained and stood the test of time. Many building societies have fallen victim to the credit crunch over 3 years ago. This was due to the issues with raising funds on the money markets, and inter-bank lending at the time was virtually suspended.

 

This left many building societies involved in equity release lending, moving their mortgage book of funds towards the most profitable products such as mortgages which provide greater profit margins that equity release over the shorter term.

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Within the last 10 years we have had Northern Rock as a major provider; however we know how the how the market crash affected them & its customers! They are now accepting repayment of their equity release schemes to clear their mortgage books of these old equity release plans.

 

Northern Rocks early equity release mortgages only had 5 years early repayment charges, so it could be an excellent chance to get a better deal today with the current crop of low interest rate home equity schemes available. (Northern Rock has sold its equity release book now to Papilio UK Equity Release Mortgages)

 

Other building societies that tried and failed due to the credit crunch were Bristol & West, Saffron Building Society and a notably, although temporary, unique scheme launched by Godiva. They were the first to enter the equity release market with an equity release plan with NO early repayment charges. Unfortunately, again the credit crunch put paid to this, and you would hope a similar product would one day re-enter the lifetime mortgage market; albeit the Hodge Flexible Lifetime Mortgage Plan goes some way to meeting a no redemption penalty equity release plan – see below.

 

So what types of equity release providers are currently in the UK equity release market?

It seems the secret to success and longevity is to find a niche product with a USP in the equity release market.

Lets consider the current lifetime mortgage providers and the schemes on offer and you can see why…

 

 Provider  Product Name  USP
 Aviva  Lifestyle Flexible Option Lowest interest rate currently in the market.Rates currently start from 5.57% and come with free  valuation and cashbacks
 Stonehaven  Interest Select Plan An interest only lifetime mortgage. Monthly payments help maintain a level balance.Great inheritance protection for the children
 More2life  Enhanced Lifetime Mortgage Offers the maximum release in the market by underwriting on the grounds of ill-health. The more severe one’s heath the greater the release
 Hodge Lifetime  Flexible Drawdown Plan Hodge have two USP’s. One is the ability to repay upto 10% of the balance each year. The 2nd is you can downsize after 5 years with NO early repayment charges

 

Today’s range of equity release companies stem from insurance companies to finance houses who have the ability to fund their lifetime mortgage schemes via their annuity books. We still have a mutual society and the remainder are private companies who manage to find funding from business partners.

 

Whatever the funding source, the current breed of equity release schemes offer the most diverse range of plans and competitive interest rates the equity release market has seen.

 

If there are any lifetime mortgage plans, old and new that you wish to discuss further, contact mark@equityreleasesupermarket.co.uk or call the Equity Release Supermarket team on 0800 678 5159.

 
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