Equity release Q&A
There are lots of different types of equity release schemes. How can I compare them?
There are only two main types of schemes: lifetime mortgages and home reversions. The most popular is a lifetime mortgage, which is like an ordinary mortgage except that you don’t have to make repayments every month. Instead the loan and interest is deducted in one go when you die or sell your home.
You can often borrow up to 30 to 40 per cent of the value of your home with a lifetime mortgage and the typical age of people doing so is 65 to 75. With a home reversion you actually sell your home or a part of it to a specialist company, which then allows you to live there until you die or go into care.
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You can generally sell up to 100 per cent of your home and people aged 75 or older can raise more cash, as their life expectancy is shorter. However, there are reversion plans around available to people aged as young as 50.
How do I decide which particular scheme to go for?
You should seek expert advice. There are many independent financial advisers who specialise in equity release, and they will be able to take a look at your individual circumstances and explain what the best options are for you. Don’t be tempted to make a decision on your own. Many people have regretted taking out an equity release plan because they can be very inflexible, which can cause problems if your circumstances change.
“One size definitely does not fit all with equity release – it all depends on your individual needs and circumstances,” says Michael Holt, managing director of SYH Charterhouse, a company which arranges non-advised home reversion plans for the over-50s. “Do your homework – look online at the different plans available, call and talk to companies about their particular plans, and always make sure that the company is authorised and regulated by the Financial Services Authority.” In fact it may even be better for you to look at other ways of raising cash, such as downsizing your property, borrowing money from family, or even applying for a standard mortgage depending on your age and income.
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Will my family get any money when I die?
“This depends greatly on many factors including the type of scheme taken out,” says John Digman, head of Newcastle Building Society’s Equity Release Service. “With a home reversion scheme your family can be guaranteed some benefit from the property on your death. They will receive the sale proceeds relating to the portion of the property which you still own. This also includes any appreciation on the property value on the portion still owned. With a lifetime mortgage the portion left is more difficult to predict as it will depend on how long the loan has been outstanding and the interest accrued, in addition to any movement in property prices. However, there are providers who allow you to protect a proportion of the equity if required. All products from SHIP providers carry a no negative equity guarantee.”
What is drawdown, why might I want to consider it, and how does it work?
“A drawdown facility allows somone to release further equity at a later date,” explains Clare Cracknell, director of marketing for Saga Personal Finance. “Drawdown can provide reassurance that there is a reserve of cash available, but you don’t have to release more money than you need. Some schemes can guarantee a drawdown for life, others offer the facility for a number of years.”
People who release equity should always only take what they need; they should not find themselves with tens of thousands of pounds in a bank account.
Can you get additional cash from both types of scheme?
“Yes, there are some reversion schemes and some lifetime mortgages that offer facilities that allow customers to release more equity in the future,” says Cracknell. “It is important that you fully understand the terms, however, as you could be paying more interest on your initial loan for example because you opted to have the reserve.” In other words, if you may not need a drawdown facility, don’t get it, as it could be a costly decision.
How much do schemes cost and how and when do you pay for them?
“It depends entirely on the type of equity release plan and the company that is offering it,” points out Michael Holt. “Typically an application fee is required, and prices for this vary. The initial fee usually covers the cost of valuing your property as well as any associated administration costs.”
Under FSA regulation, companies must make it clear that they charge such a fee and detail exactly how much will be charged. For example, SYH Charterhouse charges a £300 application fee, which covers the independent valuation of the property by a Chartered Surveyor. “There may also be legal costs involved. Some companies will help with or even undertake solicitor’s fees and legal costs, but it is down to the individual equity release company.”
How can I make sure I am protected?
Lifetime mortgages have been regulated by the City watchdog – the Financial Services Authority – since 2004 and home reversions since April 2007. It means any company selling the plans has to conform to certain rules and regulations and, if anything goes wrong, you may be able to claim compensation.
Buying through a SHIP-registered firm gives added protection as they have to conmform to certain professional standards.
Ask an adviser if they have the relevant equity release qualification, such as the CII Certificate in equity release. If not then seek out an expert.
Remember, taking out an equity release scheme is not simply raising some cash now, but making a financial decision that will affect you for the rest of your life, which could mean many decades ahead.
Make sure you know exactly what you’re getting into. There are other schemes which offer cash to older homeowners but they are much riskier and a good adviser will not recommend them.
Be wary of ‘buy and rent back’ schemes, for instance, where a company buys your home and grants you a lease for a set period. They have only been around a while but already there have been heartbreaking stories of elderly folk ending up virtually homeless because they didn’t read the small print on these schemes.
The key to a successful equity release arrangement is understanding. Take as much advice as you need, and don’t be rushed into making a decision.
Where can I get advice?
• A list of specialist advisers and product providers is available on the website www.ship-ltd.org, the site of the Safe Home Income Plans (SHIP) network.
• To find IFAs in your area, visit www.unbiased.co.uk or call 0800 085 3250.
• For help comparing different types of equity release plan, visit the Financial Services Authority’s consumer website at www.moneymadeclear.fsa.gov.uk.
• For key questions you should ask when considering different types of equity release, you can get a useful free checklist at www.syhcharterhouse.co.uk or go to www.saga.co.uk/equityrelease for a downloadable PDF guide.
Date: 6th, February, 2008
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