How Does Equity Release Work? Lifetime Mortgages & Later Life Lending Explained

Malcolm

Good afternoon, everyone. This is Malcolm from UK Moneyman.

I'm joined today by my colleague, Dan Osman who's our later life mortgage expert. Good afternoon, Dan.

Dan

Afternoon, Malcolm.

Malcolm

So, we're going to get into a bit of the history of equity release and where its uses are.

But before we do get into that, just for the benefit of the people that don't know you, maybe a bit of background about how you've come to be an expert in equity release and later life mortgages, your background in financial services, Dan.

Dan

Thank you. I started in financial services back in '97, worked in mortgages, investments, and protection products, both employed by banks like HSBC and self-employed as a whole market broker.

I took a break in 2008 when I retrained to become a social worker specializing in mental health and vulnerable adults which broadened my perspective on the experience of later life and funding care and areas like that.

I've been following equity release for quite some time and in 2017, I decided that the market had got to the point and the products had got to the point where I would be happy to advise on them.

So, I took my regulation equity release advice exam, and started working for a couple of companies in London and Leeds, both providing direct face to face advice, over the phone advice during the pandemic, and also delivering training to newly qualified advisors.

And now happily I've ended up with UK Money Man.

Malcolm

Great move, Dan. So, I was wondering with yourself, obviously you had the background in financial services and mortgages before and then went off.

Was it kind of the melding together of those two aspects of your career that was the attraction?

Because obviously mortgages for people in later life, obviously they can be classed as vulnerable customers, which was along the lines of your retraining.

Dan

Certainly. Yeah, I felt that my ability to assess and my experience in working with older adults and their experiences in retirement, quite often experiences including poverty and worrying about losing their home due to interest only mortgages, great impact to my mental health.

I felt that the most practical way that I could combine my skills was to become an equity release advisor, where I have the time and the latitude to support older clients and hopefully help them achieve what they want to achieve.

Whether that be retaining their family home because of an interest only mortgage coming to an end or funding a world cruise. It runs the whole spectrum.

Malcolm

Well, if we believe those TV adverts, that's what everyone does.

Dan

Oh yeah, that's what Eamonn Holmes says.

Malcolm

And obviously we know how important the ethics of this are, but the market whilst it's growing, has never kicked on in the way that perhaps people thought it would do.

And I wondered whether or not you felt that was in any way connected to the previous reputation of equity release products, those types of plans that are possibly no longer even available?

Dan

Yeah. I mean, I freely admit that like a lot of people still do, I used to consider equity release and lifetime mortgages the lending of last resort.

And that goes along with the products that have now disappeared, like shared appreciation mortgages, where the banks would also get a share of the increase in your property's value over time.

Initially safe home income plans, which has now evolved into the equity release council has driven a lot of in innovation in the industry. They've introduced a lot of safeguards for clients, things like no negative equity guarantee, which is crucial.

I mean, even for clients who borrow absolutely the maximum they can, and if they can't afford to make payments or the interest rolls up, it guarantees that as long as the property is sold for a fair market value after their death, or if they're going to long term care, then their estate, their family will never be asked for any more money.

If the lender takes a loss because the property's gone down in value, the lender takes a loss. It's not passed on to the family.

I think that was a big step forward. The press still have a fairly negative view and if it's advised indiscriminately, then that's right.

It needs to be arrived at after a thorough process of advice and recommendation, preferably including your family, your beneficiaries, and anyone else who supports people to make financial decisions.

Malcolm

And what happens when you're including those family members, where we may get a bit of sibling rivalry, where perhaps you have some children completely in support of the parents taking equity out of their property, and other family members that don't quite agree? How do those things end up getting resolved?

Dan

Well, thankfully, in my experience, that's quite rare.

Generally speaking, the families in the case, the clients that I've dealt with have been pretty supportive of their parents raising additional funds.

And at the end of the day, the choice is down to the borrower. We advise inclusion of the family and quite often you find that the ones who have objections to start with, when the process is explained fully and the full implications and what the interest may roll up to over the expected lifetime of the client, you find that a lot of their objections to that disappear.

But as we all know, there are families who have sibling rivalry and that can't always be overcome.

Malcolm

Interesting. So, let's talk about the sort of retirement landscape then if we can, and perhaps pinpoint why this market is growing, and we feel that it will kind of continue to grow.

So, I suppose, first of all, in terms of things like pension income and state retirement ages, so are those kinds of things having an impact on the lifestyle that people can expect?

Dan

Yeah. They're having a huge impact. I mean, as we know, the pension age is gradually creeping up towards 68.

People, irrespective of that, because of the cost of living increases are feeling that they have to carry on working for longer.

A lot of people are deferring their state pension to try and build it up, to make it a greater income in retirement.

Inflation is causing the buying power of existing pensions to be eroded. People simply have less money than previously they may have done.

And on the balanced side of that, you have people's property wealth increasing dramatically.

The latest figures for Q1 of this year indicate that property prices have gone up about 11%, which on the average house in the UK, not my house, somewhere else in the country, that means an additional 27,000 pounds in the first three months of this year.

It's natural that people are turning to their, to their property to provide some income from them after they've worked for their lives to buy it, to own it, to have it as an asset.

The potential for people to support themselves in way that they would like, rather than just subsisting in retirement is very attractive. It's a driver for a lot of people.

Many people have interest only mortgages, which are coming to an end either just before they're due to retire or even into, into retirement. And in some cases, they have no repayment vehicle.

They have no means to repay that money and face the stress of trying to find a solution to paying that money off that the lender is going to require.

Malcolm

Yeah, really interesting. And of course, people living now much longer than they did in years gone by.

So, those annuities and pension projections are not going to allow them to continue to live in toward anywhere near the lifestyle and that they enjoyed when they were working.

Dan

No, you can come across a couple who have worked all their lives in decent jobs, they've saved, and they find themselves essentially in poverty in retirement.

They're asset rich, but cash poor, and a lifetime mortgage if used appropriately can help to address that balance.

Malcolm

And then do you find, you mentioned there that normally the family members tend to be in favor of that.

That's presumably because they don't want to see their parents really suffer in terms of financially and they want them to enjoy some of the trappings that perhaps they enjoyed when they were working.

And perhaps they've got not so much of an eye on future inheritance than perhaps the public might expect.

Dan

Yes. As I say, in my experience, most family members are very supportive of their parents doing this.

I mean, quite often the parents are doing it partly to help their family anyway.

One of the things that we can look at if guaranteeing a set amount of an inheritance is a priority for the clients, is we can ring fence an amount of the property value, which does have knock on effects in the amount that can be borrowed, but we can set up a loan where a percentage of the value of the house is protected, whether that be 50%, 25%, whatever suits and allows the client to still achieve their objectives.

Malcolm

And is there any ever any kind of guilt on behalf of the borrower that perhaps they're not going to be in a position to gift as much inheritance as they might have been expected to? Do you ever come across people reluctant to do it?

Dan

Quite often. In a lot of cases, people are initially reluctant. They come seeking something that they feel is in some way to be ashamed of.

I think that when you go through the advice process with people and ease out all their worries, quite often those can be addressed.

And also with certainly smaller amounts of borrowing, the amount of interest that is charged on the loan, quite often people find that they can afford to pay that interest.

So, often there's a good balance there where people get the money that they need to do home improvements or repay a mortgage, but they find they're still able to make the payments that they can afford towards the equity release to stop the amount increasing as much as it would if they didn't.

Some lenders allow people to pay unlimited smaller payments across the year from as little as 50 pounds a time.

Malcolm

Interesting. Well, we've touched on a few of the main reasons that people look at this as a potential solution.

So, to repay an interest only mortgage, presumably that's because they used to have perhaps an endowment policy or some other repayment vehicle which got canceled along the way.

So, these applicants should be well aware because now the mortgage lenders are having to write to those customs on a yearly if not more regular basis to advise them that their interest only mortgage is coming to an end.

Do you still find that people are leaving it to the last minute before engaging?

Dan

Yes, absolutely. And sometimes that's also what we arrange.

If a client comes too early and they can still take advantage of a fixed rate with their interest only mortgage or whatever, sometimes it's necessary to plan with them that, okay, this is the situation now, but the right time to do this is maybe in a year or two years' time.

But yes, certainly I speak to a lot of people who say my mortgage is due at the end of the month. Whereas we can work quickly, miracles are a bit beyond us.

Malcolm

No, but I suppose if the lender knows that strides have been made to put a power in place, they can be sort of sympathetic there.

So, I suppose perhaps people set off with an intention of doing a future downsize, but as you and I know that doesn't always materialize.

Is that sometimes where capital raising to do home improvements comes in, where the customers change their mind and has decided to stay in the family home?

Dan

Yeah. Quite often when clients come to downsize, that's where they receive objections from their family.

You find often that children, or even grandchildren play a factor in the decision not to sell the family home, because that's where people still gather. It's got the family associations of younger days.

Now, at that point, we can look at two routes. Sometimes it's possible if it's a two-story house to make alterations so that elderly parents can have a ground floor bedroom and a wet room.

If that's the case, we always look at the possibility of grant funding first. There's always the alternative, always the lowest cost route there.

Sometimes the clients may be assessed that for mobility needs, they need a wet room at the ground floor in which case there may be some funding support from the local authority.

If there isn't, we encourage clients to get quotations, and we can put money in place to do that.

If these things might be needed later on, there's no need for the client to take all of that money all in one go.

They can have an amount of money to get the work done that they need now and the rest, generally speaking, can be held in a reserve facility, which is called a drawdown lifetime mortgage.

Then that money can be drawn on when they need it. An important thing to consider with that is although the interest rate might be slightly different on the draw down facility, no interest is charged until a client takes the money.

Malcolm

So, we've mentioned there about some customers doing this for income requirements and others for capital.

Would I be right in thinking that most loans are granted for capital requirements?

Dan

Yes. Certainly in my experience, I would say the majority of loans are for current and future capital needs.

Malcolm

And we mentioned our interest only mortgages, but I suppose also as well, we now have later life borrowers carrying unsecured debt into retirement.

Dan

Yes. When you talk to someone about their income and outgoing, quite often there's a quite a significant portion of unsecured credit there that's impacting on their disposable income each month.

And then it's important to work on bringing things within a manageable monthly payment, but also making sure that the client isn't securing too much in unsecured debt against their home for the rest of their lives.

So, where the unsecured debt can be paid off in part through income, we always look at that to try and reduce the debt as quickly as possible while still increasing the client's disposable income.

Malcolm

So, over the last 40 or 50 years, we've seen property pricing inflation dramatically outstrip wage inflation.

And obviously this is one way that we can potentially get property wealth out of the older generation, into the younger generation to provide deposits for their children and grandchildren.

And when you've done this for clients, do they derive some personal satisfaction that the children or grandchildren are being able to see kind of some of this potential inheritance almost fast forwarded to a point in their lives where the children can really benefit, and they can enjoy that themselves?

Dan

Absolutely. The pleasure that quite often, its grandparents, sometimes it's parents, but the pleasure that grandparents get from paying forward the inheritance and seeing their grandchildren set up in their first home, knowing that they've got a mortgage that's affordable, seeing them start their own families in a house where they've got a secure roof over their head.

It's one of the big motivators for people who have got a large amount of property wealth, but maybe little income or little savings. It allows them to participate in their grandchildren's first steps on the property ladder.

I had a client recently whose daughter was coming back to live with her, and she was doing equity release actually to buy a slightly larger house because her daughter wants to adopt.

So, she's managed to create a situation where her daughter can adopt the child that she's wanted for the last 10 years and they get to live together as a family.

Malcolm

And we've talked there about clients facing financial potential hardship in retirement, but I suppose we've got a small number of potential borrowers as well that may be doing this for other reasons, such as to mitigate against future inheritance stacks.

Dan

Yes, yes. It's something that's starting to become more of a mainstream conversation.

Most of the time clients who are considering those sorts of routes for a lifetime mortgage or equity release have an independent financial advisor and we would work alongside them to make sure that the client gets a holistic solution so that everyone's on the same page and everything happens at the right time to prevent any mistakes in terms of dates, as far as tax and income is concerned.

But certainly yes, IFAs are more often considering using releases of equity in long term complex financial planning.

And it's certainly something that we are happy to work closely with a client's financial advisor or accountant to achieve.

Malcolm

So, we mentioned there are a few things that the ownership of the property is retained by the homeowner.

So, it's not going to revert to some of the old schemes, I guess, where the banks were taking the stakes in the property.

The money can be taken as a lump sum or drawn down in stages, interest can be serviced or rolled up and paid back at the end.

And then, I guess generally on death then, or entering into care, that's when the mortgage would tend to be repaid, but with that no negative equity guarantee.

Now in terms of eligibility, this is where it can be different to a standard mortgage application that I might get involved with because we don't have the minimum income requirements, the affordability checks, and also there's a more flexible approach to customers that have had adverse credit history.

Dan

Yeah. I mean, that can have an impact and we would always look at a client's affordability in terms of making sure the long-term planning is in place for as far as we can see.

I mean, no one's got a crystal ball, but when I talk to a client about equity release, quite often we're considering life events that may reasonably happen in the next 20 years.

So that's important, but no, equity release is not income assessed so that helps people who have lower incomes or maybe benefit income.

In terms of the income, when we look at something to support someone's income in retirement, if they have means tested benefits, we can look at a product that would provide a drip feed in terms of small amounts of equity released over the years, so that it's not impacting on benefit thresholds, but it's still providing a little bit of extra money for whatever the client needs that money for.

The big eligibility thing is 55. The older you are, the more you can release.

A lot of people come with having had various aspects of life insurance or other sorts of protection over the years and they fear to disclose illness or long-term health conditions.

With equity release, there are some lenders that provide medical underwriting. Now, this generally works in the client's favor.

If the client's suffering from a medical condition which would be deemed to potentially reduce their life expectancy, then the lender may be prepared to offer more or on different terms.

But that's highly individual and needs to be arrived at through a process of advice and recommendation.

Malcolm

So, as we touched on here, it is all about the ethics here in considering all the other potential solutions.

And you've mentioned there the potential effects that this could have on means tested benefits, the importance of involving family members along the way to make sure everyone knows exactly what's happening, and having the opportunity to be accompanied by a family member to the client meetings.

But because of course, if one of these plans is paid back early, then I suppose the early repayment penalties, charges could be quite onerous.

Dan

They could be. Again, innovation in the industry recently has meant that all of the lenders now do offer fixed early repayment charges.

There are some of the old types available, and I'm quite happy to talk through those with any client specifically, but now early repayment charge tends to be on a fixed sliding scale.

They vary from lender to lender, but yes, they can be onerous. So, one of the important things and again, why I say that conversation with a client is about what's coming up in the future, because although they may not want to downsize now, they may feel that's appropriate in three- or four-years' time and we need to build in the flexibility that allows for downsizing protection, some lenders call it.

And that varies from lender to lender, but there is generally portability.

So, a lifetime mortgage can be moved from one property to the other.

If the property is much cheaper, then part of the lifetime mortgage might have to be repaid because the amount you can borrow is based on the youngest borrower's age and the value of the property.

So, if you're going to a much lower property, you may have to pay a little bit back, but we can mitigate that.

The other thing that concerns people is, in a couple, what happens if one of the couples dies or goes into long term care, because sometimes people don't want to feel that they would be stuck in that house, which may be painful for memories or may be too big for them to manage on their own.

Most lenders again now offer what I call a compassionate clause, which means that if something happens to one of you, either death or enter into long term care, then the other has three years to sell the property and repay the mortgage with no early repayment charges. So, it gives that flexibility.

It allows the survivor to sit back and think, what do I want to do now? Say you want to go move in with family.

Malcolm

So, it sounds like the providers are continuing to innovate.

Do you see more, sort of predict more new lender entrance into the market over the next five years?

Dan

I think so. I think so. I think that the flexibility, the dynamic nature of the market, and certainly the size of the market is going to lead to other people coming into the market.

I mean, we've had recent editions with Standard Life. They've been in the market for less than a year, I believe now, and they're certainly driving some new products, new and competitive rates.

The more lenders that come into the market, the more competitive the marketplace is going to be, which is going to be better for clients all around.

Malcolm

And just finally, Dan, for anyone listening to this, who might identify one of their family members as a potential customer for this type of equity release mortgage, what kind of consumer protections are in place for them given the potential vulnerability?

Dan

Well, certainly you've got the protections that will be provided by your advisor in terms of your meeting.

Now, this is the stuff that generally impacts on the client and it's about the time that the advisor will take.

It's about involving your family, and it's about providing a detailed, written recommendation before the client submits an application, not afterwards as is sometimes the case.

So, the client will have the details of the plan, the plan quotation, the key features of illustration shows very clearly if the client doesn't make any payments exactly what the interest owed would be at the end of each year.

So, you can see after 10 years the effect of the roll up and the total balance that would be owed.

Of course, we're regulated by the financial conduct authority, which as you know is the watchdog which regulates almost the entire mortgage advising and financial services industry.

We are also members of the equity release council. This is a voluntary organization, but we feel that it's important as advisors to be able to feedback our experience of the products in the marketplace and feedback improvements that we feel would benefit clients in the future.

Financial services compensation scheme is also there, and should you need to make a complaint about us, there's always the financial services ombudsman.

Malcolm

Thanks for your time this afternoon, Dan.

And if anyone wants to get in touch, Dan's email is dan.osman@ukmoneyman.com That's dan.osman, O-S-M-A-N, @ukmoneyman.com.

And we'll be happy to give a free initial consultation for you or any family members that are interested in equity release.

Thanks again, Dan.

Dan

Thanks, Malcolm.