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Why I'll Be Using Equity Release In My Retirement

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By Christina Jordan | 27 June 2008
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Even with the recent softening of the housing market, house prices have still risen a long, long way since the early 90s. As a result many older people find that they're living in a valuable asset (their home) but don't have much other money.

Understandably many pensioners don't want to downsize and move to a smaller home, but they would like to unlock some of the value of their prime asset so they can enjoy their retirement more. Equity release schemes allow pensioners to do this.

However, on the downside, these schemes have received a lot of criticism in the press over the years, including on this site. But I believe that equity release is a useful tool that has been unfairly maligned.

Don't get me wrong. For some people there are other options:

  •         People can consider downsizing instead, but it's not always appropriate
  •         There might be extra benefits and grants they are entitled to that could solve their financial problems. Or there might not...
  •        And yes, people can ask family and friends for financial support. But the friends and family might say no.

The truth is that with an ageing population and pensions shortfall, there is no plan B for many people. Equity release plans are here to stay and I believe they will become a common feature of the financial landscape over the next 20 years.

Times have changed

The products are now much more flexible than in the past and providers are constantly developing equity release propositions to meet consumers' needs. For example:

  • If you take out a lifetime mortgage ( a type of equity release scheme), you do not need to take a lump sum and pay interest on it for the rest of your life. You can drawdown money as and when you want it, which keeps your interest payments down and means that you only take money you really need. In the first three months of this year, well over half of equity release products were taken out on this basis.
  • You might think that all equity release schemes don't fully value your home. But Retirement Plus has a home reversion  scheme that does just that, for a share of their property at the start of the plan. In return you grant the provider an option to buy an increasing beneficial share in the property over the life of the plan.
  • Equity release products are now available to those with health problems, offering higher cash sums than standard providers can usually provide.
  • Lifetime mortgages are available without early repayment charges. Godiva (part of Coventry Building Society) offers such a product, taking away the assumption that equity release has to be a long-term commitment.

How safe is it?

In order to give advice on equity release, brokers must be regulated, work within clear rules and have passed an extra qualification in lifetime mortgages and reversions on top of their mortgage exams if they want to advise on any SHIP member products.

Advisers must:

  • Give lifetime mortgages and home reversions equal consideration
  • Look at how an equity release plan would affect the borrowers' entitlement to mean- tested benefits and other State support
  • Check whether accessing money from another source, including local authority grants, investments or savings would be more beneficial to the client.

In addition, SHIP members all sign up to a code of conduct above and beyond statutory regulation.

  • They must allow the customers to use an independent solicitor of their choice that will explain to them the legal ramifications of equity release, and the importance of involving family members in the decision.
  • Their products must carry a no negative equity release guarantee, meaning the customer's debt will never be more than the value of their property
  • They have the right to live in the property for life and all SHIP products are portable if they want to move house.

The Financial Services Authority recently conducted research into the sale and advice-giving process in the equity release sector with extremely positive results, as most consumers said they fully understood the risks involved with the products.

Equity release products are by no means a fix-all solution and are wholly unsuitable for many people. But they are worth considering and should not be confused with past schemes that are a world away from today's products. Just make sure you provider is regulated and a SHIP member.

For an altenative view on equity release schemes read Jane Baker's article from last year.

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool.

At 13:55 on June 28 2008, Terrapin1 said:

I think we need a system whereby the equity can be used as security on another property to help the next generation-so for example £100K of equity could have a charge affixed to it as deposit on son/daughter's house. It's simple and the greedy banks don't make a bean-but as they have stolen billions from the elderly anyway, they could make themselves look a bit more like human beings instead of slavering profit monsters.

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At 07:43 on June 30 2008, GarethofFerret said:

You say, "The Financial Services Authority recently conducted research into the sale and advice-giving process in the equity release sector with extremely positive results".

Could you point met to this as the FSA research I'm aware of has been critical of much of the sale and advice-giving process.

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At 09:24 on June 30 2008, ChristinaJordan said:

Hi GarethofFerret

it was the second stage of the regulator's Mortgage Effectiveness Review, published on 31st March 2008. It focused on sub-prime and lifetime mortgages, and lifetime advice and sales received mainly positive findings. In past reivews this has not been the case (which was more widely publicised). You can find the full review on the FSA's website.

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At 10:52 on June 30 2008, gartons said:

I want to leave some assets for my kids, not an outstanding mortgage to some parasitic financial company.

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At 11:37 on June 30 2008, sackchap said:

How about a follow-up article about the optimum timing of equity release? Many people needing an income boost would do better to draw down more from their pension pot (up to 120% of equivalent annuity) in the early retirement years, then turning on the income from equity release later, thus keeping the overall charges lower. Equity release companies don't tend to highlight the potential benefits of this approach...

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At 14:04 on June 30 2008, chasbmw said:

Surely it would be better to release cash by downsizing as you have the chance of ending up with a smaller house that will cost less to run in an area with the sort of facilities needed when you are no longer able to drive.

Much better than ending up with a large debt hanging over you

Chas

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At 09:35 on July 01 2008, sstudent said:

My parents recently asked if I felt that equity release was a good idea. Like many I felt it was not a good idea due to the bad press & various horror stories. A view shared with others I have spoken to.

Until equity release schemes are well reulated I will continue to stand against them.

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At 12:09 on July 01 2008, burnhole said:

I adviced my parents to release some equity about 3 years ago as their pensions were only enough to pay for living expenses and occasional treats. It has meant that they have been able to holiday each year and enjoy their golden years. I and my two brothers looked into the small print and all agreed that they should enjoy the money now rather than leave it as inheritance - we can stand on our own feet.

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At 17:59 on July 01 2008, PleaseDeleteThis said:

Is the truth that with a short ageing population and pensions age gap, there is no plan B for many people who didn't have a plan A? Equity release plans are staying here to the cost of our benefits forever and I believe they have already, and will become, a genuine feature of the common ownership of the financial landscape over the next 50 years during Global Warming.

Don't forget that if you take out a lifetime equity release mortgage type of scheme you do not need to pay interest but take a lump sum plus the interest on it for the rest of your life. You can drawdown money at the Bank of England base rate, as and when you want it, without restriction on the quantity topped up by the income support agency for couples with 4 or more children, which keeps your interest payments down and means that you only take money that you really need for essential daily requirements or medical expenses. In the first 12 months of this year, well over 17 of the equity release products were taken out over the market on this basis.

You might think that all equity release schemes don't fully value your home. This is true, but Super Retirement Triple Plus has a home revision scheme that does just that and even more, for a 51% share of the property at the start of the plan. In return you grant the provider an option to buy an increasingly large part of your housing associations beneficial share in the property over the life of the plan.
Also equity release products are now available to those with health problems, offering higher cash sums than standard providers can usually provide. Actuarial calculations over an extended period indicate preferential rights issues on higher mortality rates of long term disabled mortgagees allowed revisionary bonus payments for those taking advantage of early retirement.

Clearly Equity Release is a simple, transparent and easily understood financial vehicle for the provision of income in ones twilight years, and not the stealthy misappropriation of geriatric wealth as it is often erroniously termed by those not in receipt of hefty commissions.

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At 15:12 on July 02 2008, margaretc said:

I can comment on this topic from a position of some personal experience, rather than using scare stories as in some of the comments above.

We decided to do equity release in 2003 just to pay off an existing mortgage. We'd have been repaying that mortgage until we were 83, and we saw no point in going on paying it just in time to die and leave it to someone else. All we need is the roof over our heads for as long as we need it, and any 'lifetime mortgage' covered by the requirements and regulation of SHIP (safe home equity plans) gave us all the guarantees we needed.

'Downsizing' is something often quoted as a solution, the assumption being that we're all living in the large family homes in which we brought up children, mortgage long since paid off, rattling around in rooms that we don't need, and having bought that family home at a time of cheaper house prices therefore having gained a 'pot' of equity to be tapped. That wasn't the case with us. There's not much you can 'downsize' to from a 2-bed bungalow in Essex, unless it was to an ex-mining village in the Midlands and a one-bedroom flat.

We didn't need the income, but we saw no point in going on paying £260 or so every month for years to come. We could see pleasanter uses for that money, as well as essential maintenance - we had the roof replaced in 2006. We're very happy with what we did and why we did it.

Chas says: 'Much better than ending up with a large debt hanging over you'. Yes, but it's a debt you'll never be called upon to repay! It will only be repaid when both of us no longer need this house to live in, when it's sold in other words.

burnhole and sstudent mention 'persuading' and 'advising' their parents. Under SHIP requirements our conveyancing solicitor had to tick boxes, one of which asked 'have you discussed this with family members?' in fact none of our family members had any interest at all in this. 'It's your money, do what you want with it' was the general consensus. We did not ask for advice from any relative and we would not have taken kindly to one of them trying to 'persuade' us in any direction. In response to gartons, who wants to leave an inheritance to 'kids' - well, having brought them up, it is now down to the next generations to stand on their own feet as we had to do. We have no great interest or intention to leave any inheritance to anybody.

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At 14:18 on July 03 2008, LCF said:

PleaseDeleteThis said: "You can drawdown money at the Bank of England base rate"

Could you advise which schemes offer this as we have only seen schemes at predetermined rates. In addition, one scheme would allow further drawdown if prevalent base rate exceeded 10%.

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At 14:58 on July 04 2008, dave02heasman said:

"I want to leave some assets for my kids, not an outstanding mortgage to some parasitic financial company"

Me too, but what if my kids are 50 by the time I croak? It'd be handy to give 'em a deposit for a place before they become infertile.

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