We had several questions from you regarding the last two weeks’ columns on equity release which I will cover.
There have been a few old tales circulating around equity release for many years, but those issues have disappeared long ago.
“If I take out an equity release, can I downsize later?” Yes. Around 60% of products allow ‘downsize protection’ enabling you to repay your loan with no early repayment charge and downsize.
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“If I have a retirement home or sheltered accommodation, can I have an equity release plan?” Around 50% of equity release products may be available on these types of ‘age-related accommodation’, so that isn’t a problem.
“Are there large penalties if I want to shut down my equity release plan?” The Equity Release Council (ERC) showed that nearly 90% of equity release products have early repayment charges that slide to 0% over time, so asking your Independent Financial Adviser regarding that is key if you are worried about it, and don’t want to feel trapped.
“If my spouse or I were to pass away, will I be lumbered by the equity release plan?” The Equity Release Council show in their recent report that 98% of equity release plans have, what is called, a compassionate repayment window that allows the loan to be repaid early for a set period after the death of a spouse, or their move into permanent care.
“Can I be forced out of my home?” No. Your equity release plan has a contract, and, if you abide by that, you will live in your home until you pass away or move into care.
“If I die, the equity release provider will own the home and my family won’t receive it as an inheritance.” This isn’t true at all. On your passing, the loan needs to be repaid. The proceeds of the sale of the property pay off the loan and any excess will be distributed according to your will. Your survivors/beneficiaries may also be able to repay the loan with their own means and retain the property without it having to be sold.
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“What happens if I die and the loan outstanding is more than the property value?” That’s not your risk. That’s the risk of the provider. If the loan is more than the house value, your family won’t be left in debt, as one caller thought. That excess falls with the provider if it should occur.
“If I have a mortgage, can I take out an equity release?” Yes. There are pros and cons to that, and you’ll need some advice, but, you will need to repay the existing mortgage at the same time. There are many people who are reaching the end of their mortgage term and where they have no repayment vehicle in place.
The lender requires repayment, and so many are turning to equity release to repay the existing debt and possibly some extra for holidays/home improvements. The rate will likely be higher than you are used to paying on your mortgage so be mindful of that.
“Equity release is unsafe.” I remember well, the beginning of equity release at a time when the financial services profession was less than a profession. It was mind boggling and full of salesmen with little or no integrity, sort of modern day politics. I then remember nearly 32 years ago the introduction of the governing body - the Safe Home Income Plan. (SHIP). This is now the Equity Release Council.
All members of the ERC (90% of the sector), agree to abide by certain key rules:
- You can never owe more than your home is worth;
- products must have a fixed, or capped rate of lending for the life of the loan;
- you must be able to move your plan to another property if it meets the lending criteria;
- you can make penalty free partial repayments; you can stay in your home for life or before you go into long term care without threat of repossession.
That should cover most of the main questions and ‘myths’ we have seen. Equity release has developed a lot under the regulation of the ERC and the Financial Conduct Authority (FCA) and is highly regulated, a far cry from 32 years ago. But, use an IFA who is registered under the Equity Release Council and remember those other tips from two weeks ago.
- If you want to know if equity release is for you call my mortgage director, Pat Greene and ask for a complimentary 30-minute exploratory meeting. Email Pat on pgreene@wwfp.net or call 01872 222422.
- Peter McGahan is the chief executive officer of independent financial adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.