Image source/Rex Features
Welcome to part 2 of the bluffers guide to Equity Release...
A better way to earn money from your home
So the homeowner who wanted £50,000 from his £350,000 property could apply for a lifetime mortgage. At the rates discussed and assuming he does not want to make monthly repayments, the amount he owed would double over a ten year timespan meaning he would owe just over £100,000 in ten years. This is expensive when compared to the £25,000 cost of moving, but he does retain his local friends and family. This middling example was chosen because it shows lifetime mortgages when they are at their worst. Someone who only wished to borrow £10,000 would be arguably better off after ten years than someone who moved. Someone who wished to borrow £100,000 would need to move into a bedsit to raise the funds they needed. Some cold hard calculation needs to be made to discover the best option, for both the homeowner and their children.
But then children come with their own needs. The fact of the matter is that the younger generations have not had it as easier as those that have come before. Deposits for first time buyers are ruinously high. Grandchildren have much higher living costs coupled with large amounts of student debt. Rising divorce rates can leave children financially ruined. In short a rising number of children and grandchildren have a real need for capital now rather than waiting for any inheritance. Downsizing and lifetime mortgages are becoming a lifeline for struggling families with asset rich parents and grandparents, and they do not begrudge any reduction in inheritance when they are benefitting in the now.
On top of this pension income is in freefall
The base rates and financial crisis have had a real impact on annuity returns which in turn has drastically tightened the amount pensioners receive on a monthly basis. The government has recognised this problem and has made radical changes to the pension rules, allowing much greater freedom in disposing of a pension pot. Although this has given greater freedom, it has not solved the underlying problem of pensioners just not having enough funds to live out an increasingly longer retirement.
With this in mind the government has been in talks with the major players of the equity release market, including the Equity Release Information Centre, the Equity Release Council and major lenders such as LV= and Aviva, with the aim of making equity release a more widely explored option for pensioners experiencing the pension crunch.
The future of Equity Release seems to be continuing the rise
The growth in the overall market is increasing year on year, keeping pace with a more aging population. The reputation of the sector has improved dramatically since the introduction of modern equity release plans in the early 80's which suffered the same bad practices as endowment sales in that early unregulated environment. Today equity release is one of the most regulated fields of finance in the UK. The Financial Conduct Authority have overall control of the sector, and any companies must be authorised by, whether they are lenders or intermediaries. On top of this the Equity Release Council enforces the Safe Homes Income Plan (SHIP) code of conduct which gives homeowners more safeguards such as the no negative equity guarantee. People are realising that unlike traditional mortgages, lifetime mortgages cannot go into arrears, and therefore homes are not at risk due to non-payment.
With growing confidence in the market there also needs to be a growing awareness of the risks
The impact on inheritance has already been discussed, but there are also other things to take into consideration. Are you wanting to downsize in the future, or simply move to another area? Although this is possible with a lifetime mortgage, it is much simpler to achieve without one. An just as easy to take out an equity release plan on your downsized property in the future than it would be to port one over from your current home. If you are in receipt of benefits you must be aware that a large income of cash could affect your entitlement to means tested benefits and potentially make you worse off on a monthly basis than you were before. Even though the equity release field is simpler and safer than ever before the need for specialist advice from a qualified independent adviser is as essential as ever.
The Equity Release Information Centre has been in the Equity Release market since 1985, and as such is the longest established equity release intermediary in the United Kingdom. They are offering advice and consultations on the equity release market and all the plans available in the UK and are one of the few major equity release advisers in the UK with no ties to lenders, and therefore are truly wholly independent. These are lifetime mortgages or home reversion plans, to understand the features and risks ask for a personalised illustration. For a free brochure on Equity Release from ERIC, please call on 0800 077 6885.
By Ed Haliwell