What is Equity Release?

Malcolm

What is equity release? So maybe you can take that one for us, do with what you will.

Dan

Well, let's bring it back to the basics. Equity release refers to a plan available to people aged 55 and over, that allows them to release tax free money from their main residence to help with retirement or helping family, a whole range of solutions that equity release can help with.

There are two main fundamental types of equity release. We’ll deal with home reversion first. This is what quite a lot of people, particularly people have been looking at the market for a number of years, often associate with equity release. This is when you sell all or a part of your home to a plan provider, in exchange for a discounted tax free lump sum. So you would sell maybe 60% or 70% of your property, still retain some ownership and get an amount that's based on your age and the value of property. Now there's still a degree of flexibility with this, with most providers you can still move home and things like that.

But you are losing a portion of your ownership of the property. And if you sell a hundred percent of your home on death there’s that, you know, the house reverts to the provider's ownership, and there's nothing left to pass on to your family.

Things have moved on as well in the equity release industry and now the product that becomes most synonymous with equity release is the lifetime mortgages.

Now to talk about all the different types of lifetime mortgage and the different ways that it can operate is the subject of another video.

But loosely, a lifetime mortgage is a loan against your property. So you retain a hundred percent ownership of the property.

The loan is a charge against the house just like a normal residential mortgage. Where it differs from a normal residential mortgage is that there is choice about whether or not you make payments towards it.

So a roll up lifetime mortgage is designed to provide an initial lump sum and then possibly further lump sums later on if that's needed.

The interest is fixed for life, and that interest accrues on the loan, and it compounds each year.

Now the compounding effectively means that the interest that's added in year one increases the balance and then you pay interest on the balance plus what's accrued in year one, in year two and so on and so on.

Now this is what can lead to the debt against the home increasing, which is why a lot of people now choose to have a more flexible form of lifetime mortgage, which allows for payments either monthly or on an ad hoc basis.

So you can make payments as and when you can afford. I've got clients who have investments. They receive an amount of money in April. And they pay the annual interests of the equity release in April.

Some prefer to pay as and when. The flexibility on payments has got to the stage now where some lenders offer unlimited payments over the course of the year from as low as £50 a payment, which makes it a lot easier for people to manage their budgets and still do something to stop the roll up effect of the interest.

Malcolm

And are people worried that this compounding interest is going to get to the point where there's no equities left or even a debt passed on to the loved ones upon their death?

Dan

That has been a concern especially in the past. All the products that we deal with are compliant with the Equity Release Council’s guidelines, which means that they all have a no negative equity guarantee.

So even if you borrow the maximum amount of money that you possibly can, you live for longer than expected so that the interest rolls up and property prices fall at the point of sale, which is generally after your death or entry into long term care.

If that leaves a situation where the the debt is more than the value of the house, the Equity Release Council guarantee, the no negative equity guarantee means that after you've paid solicitor's fees, agent's fees for the selling of the house, then the family will not be asked for any money.

The debt will not pass to the client's estate as long as the house has been sold for a fair market value at the time.

Malcolm

And what about other applicants who perhaps don't have dependents or relatives that are expecting an inheritance, or perhaps those kids or grandkids have made their own way in life then, are they sort of less likely to service the interest than those that are protective of that future inheritance?

Dan

Sometimes, but it's such a personal choice that I mean, some people will pay the interest because that is what they have always done, and they don't feel comfortable with the effects of compound interest.

Some people, yes, will let it roll up and it's not unusual for us to get a situation where a single person with no dependents, no close family, just makes a simple will in terms of leaving whatever balance is there to a charity or you know, an organisation that they're involved with.