Do you remember Dudley Moore and his sketch on honesty advertising in the movie ‘Crazy People’? Have a look. He is asked what marketing is while he’s with his nurse girlfriend in a psychiatric hospital. When he explains, they respond: ‘so you lie for a living’. It led to the line: ‘Volvos, they’re boxy but they’re good’. That’s all we need to know. ‘Get to the point and tell me why it’s helpful, or can hurt me’, is a more honest marketing strategy.
When I see financial products being marketed, I think I could have had a great afternoon with Dudley Moore creating financial adverts: “People lose money on these funds, but they lose less with ours”. You might need to watch the movie.
The Advertising Standards Agency (ASA) recently censured an advert on Equity Release from Key Retirement Solutions claiming it used ‘fear’ about the potential of high mortgage rates hurting people’s finances, and that an Equity Release plan was comparable to a normal mortgage. They aren’t. I sort of got Key Retirement’s idea, but we must understand that the people most likely to make a bad decision, are those who just read headlines and don’t take advice. Headlines hurt.
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I’ve covered the benefits and pitfalls of Equity Release in recent articles along with how to use an Independent Financial Adviser to put one into practice, so I’ll not cover that here.
Re-mortgaging because of high interest rates and replacing it with Equity Release as a solution is contentious and that needs careful independent financial advice.
Firstly, will mortgage rates remain high? That’s the above driver to replace a mortgage with an equity release – no, I don’t believe they will. We’ve prepared a detailed guide on that, so please do message me for a copy.
You then must consider the pitfalls of an Equity Release. Those customers used to rates of around 0.5% for many years, became acclimatised to that. They are now struggling to pay the interest at nearly six per cent, so they consider an Equity Release so that they don’t actually have to make monthly payments, instead allowing the debt to roll up against their home. An actual example here: a customer has a mortgage for £94,990 which at 1% would be £79 per month. At today’s rate of 5.49%, that is now £435 per month, and that’s just the interest.
Looking around on the internet, I can see others making this same comparison/promotion, which of course may look attractive if you feel rates will continue to rise, but not if you don’t. Please note: It’s rare for financial advisers to have in house economists or those capable of calculating where rates may move, so don’t expect that off them.
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Now, just consider what rate you will move to if you moved to an equity release. A typical mortgage rate today is around 5.49% as above, and the better Equity Release mortgage rates start at nearly 1.8 per cent more at 7.27%.
Is it better to wait and see if mortgage rates drop further before panicking into an Equity Release and being locked into a high rate as above? I think so. If you can, try paying the higher monthly interest for as long as you can and keep an eye on rates and our Mortgage Market Review which we are happy to share with you. Equity Release is always an option later if you need it. There’s no panic.
If, however, your finances find you pushed into Equity Release, take independent advice, not advice from someone who makes their money selling you that one product and also from a restricted number of providers.
If your adviser doesn’t have an independent mortgage team with all products available, you won’t have access to those products. If they aren’t an independent Equity Release adviser, the same applies. Also, if they are paid solely via commission rather than a fee, there could clearly be a bias for you to do some sort of product, so they are paid either way.
If all you have is a hammer, everything looks like a nail.
- For advice on Equity Release or for a copy of our Mortgage Market Review, please call my Mortgage Director Pat Greene on 01872 222422 or email pgreene@wwfp.net
- 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.