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Equity release to pay off mortgage?

Chief executive of Worldwide Financial Planning, Peter McGahan discusses the pitfalls of equity release

Peter McGahan, chief executive of Worldwide Financial Planning(Image: © Richard Trainor)

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.

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.