Property Income Plan and Equity Release

pauline_kimber

I have been told they are very different, but are they really? Can anyone explain the difference to me

tedderr

As I understand it an Insurance company places a charge on 50% of the equity you have in your property. They then pay you 5% of that value per annum for 3 years (or shorter if you wish to pull out with 90 days notice) So your property is worth £250000 50% = £125000 they pay you 5% of £125000 each year for 3 years. £6250 X 3 = £18750 this is paid gross so you will have to check your tax liability. You pay nothing back you keep your whole home value and there is no interest charged.
The only risks are that if the Insurance company goes bust, their charge on your property stops and you stop getting paid. You can have the option to extend the 3 years depending on the circumstances at the time.
Hope this helps.
Robin.

sleepless_saver

tedderr wrote: »

As I understand it an Insurance company places a charge on 50% of the equity you have in your property. They then pay you 5% of that value per annum for 3 years (or shorter if you wish to pull out with 90 days notice) So your property is worth £250000 50% = £125000 they pay you 5% of £125000 each year for 3 years. £6250 X 3 = £18750 this is paid gross so you will have to check your tax liability. You pay nothing back you keep your whole home value and there is no interest charged.
The only risks are that if the Insurance company goes bust, their charge on your property stops and you stop getting paid. You can have the option to extend the 3 years depending on the circumstances at the time.
Hope this helps.
Robin.

I must be slow today, but I don't understand this. What's in it for the insurance company if you retain the whole value of your house and don't pay any interest?

Penfold12

New poster. I must profess to having an interest in this, as I promote this product. If I can explain how it works...

First of all it is NOT equity release. You do not sell anyone a share in your property. Effectively what you are doing is allowing the insurance companies to use a percentage of your asset for their accounting procedures. Currently the insurance companies involved are [TEXT DELETED BY FORUM TEAM], and Prudential.

The process is very simple;

£400,000 property mortgage free.
50% equitable charge of the property is signed over, and placed into escrow. (£200,000)
The escrow then pays you 5% of the charge value monthly in arrears for 3 years. (£10,000). Be aware that this additonal income is subject to tax!

Why is this done?

There are new accounting rules coming into force in 2012, issued by the European Union. This is more commonly known as 'Solvency 2'.
Solvency 2 basically ensures that for every £1 Million worth of business that an insurance company write, they must show that they have an asset base of £125,000.
The insurance company use the escrow value as an asset for this specific purpose.

Why does the insurance industry do this?

It's quite simply the cheapest way for them to carry this out. Think along the following lines;

They use £1million pounds worth of charge, to write £8 million pounds worth of new business. They pay 5% for using the charge (£50,000.), and earn 5% on the £8 million on the new business they are writing (£400,000). They've grossed £350,000. This is more commonly known as gearing, in financial circles.

Basically, you are a bank to the insurance company!

What are the risks involved?

Put bluntly, for the property owner, none whatsoever.

The charge is placed in escrow, and is heavily weighted in the property owners favour. The trustees of the account are not allowed to raise funds against the charges, or sell the charges on to anyone, and the account value is insured against loss, by the trustees. The cost of insuring the account is borne by the insurance company leasing the tranche.

The insurance company that leases the tranche has to make its payments monthly in advance. If it fails to make a payment on time, or gives notice that it is unable to do so, (ie they go bust) the tranche is unpacked and the charges are released automatically.

Even if you start to feel uncomfortable with it all, you can simply give same day notice, pay three months worth of income back, and if your solicitor is very good, you can have your charge released the same day.

The length of term is 3 years. You can renew if you want, or simply walk away.

You can end the contract term early, if you sell the house or die. If you sell the house, you need to give 3 months notice, or lose three months payments. There is a similar exit clause if you pass away.


Costs Involved

All costs are borne by the insurance company, however for peace of mind, I would expect the property owner to have contract examined by their own solicitors for confirmation, and peace of mind. That would be the only cost to the property owner.

The product itself, is very new, and is governed in the same way as a buy to let mortgage, ie the product itself is unregulated, however the process involved is regulated by the FSA, and must be carried out by an independent financial advisor.

It doesnt cost anything to find out about it, and apart from the property owner's costs from independent examination of the contracts, it is a win win situation.

Hope this helps to clarify things. If you need more information about any aspect, I am quite happy to answer them for you.

Linton

Hang on, my mind is boggling. What I think is happening is that we have what I guess could be called an arbitrage between the risk of failure assumed by Solvency2 and the risk of failure assumed by a 3rd party insurer. Have I got it right?

Presumably the insurer of the tranche couldnt be connected to the insurance company that wants the tranche.

If this scheme is taken up on a grand scale couldnt we have a cascade failure of all insurance companies?

Quite possibly I am very confused!!

Penfold12

Linton

Hang on, my mind is boggling. What I think is happening is that we have what I guess could be called an arbitrage between the risk of failure assumed by Solvency2 and the risk of failure assumed by a 3rd party insurer. Have I got it right?


Correct. Solvency 2 is designed to ensure that the gearing is increased to an acceptable level, should everything go horribly wrong for them.

Presumably the insurer of the tranche couldnt be connected to the insurance company that wants the tranche.

Again, yes the insurer of the thranche is not connected to the insurer of the tranche.

If this scheme is taken up on a grand scale couldnt we have a cascade failure of all insurance companies?

Funnily enough, this is one of the questions that was sent up today. Morally, I would be uncomfortable in selling these if that were the case. I will keep you informed as to the answer I receive from this one.

The first tranche is aimed at unecumbered domestic properties, and will be closed once it reaches £500million.
Our paper work indicates that the aim is to create tranches of £10billion.

Confusion does seem to be the name of the game, doesnt it?

The plan launches on the 1st September, and pre signed clients will be receiving their paperwork for examination. I am sure the murky waters will become clearer next week.

Penfold12

Linton

With regards to your first point, this needs to be elaborated upon. The arbitrage between risk of failure by 3rd party insurer and Solvency 2, is a small make up of the whole plan.

There are alot more elements involved to the whole package.

ygjeeves

Blueshell_PIP wrote: »

New poster. I must profess to having an interest in this, as I promote this product. If I can explain how it works...

First of all it is NOT equity release. You do not sell anyone a share in your property. Effectively what you are doing is allowing the insurance companies to use a percentage of your asset for their accounting procedures. Currently the insurance companies involved are [TEXT DELETED BY FORUM TEAM], and Prudential.

The process is very simple;

£400,000 property mortgage free.
50% equitable charge of the property is signed over, and placed into escrow. (£200,000)
The escrow then pays you 5% of the charge value monthly in arrears for 3 years. (£10,000). Be aware that this additonal income is subject to tax!

Why is this done?

There are new accounting rules coming into force in 2012, issued by the European Union. This is more commonly known as 'Solvency 2'.
Solvency 2 basically ensures that for every £1 Million worth of business that an insurance company write, they must show that they have an asset base of £125,000.
The insurance company use the escrow value as an asset for this specific purpose.

Why does the insurance industry do this?

It's quite simply the cheapest way for them to carry this out. Think along the following lines;

They use £1million pounds worth of charge, to write £8 million pounds worth of new business. They pay 5% for using the charge (£50,000.), and earn 5% on the £8 million on the new business they are writing (£400,000). They've grossed £350,000. This is more commonly known as gearing, in financial circles.

Basically, you are a bank to the insurance company!

What are the risks involved?

Put bluntly, for the property owner, none whatsoever.

The charge is placed in escrow, and is heavily weighted in the property owners favour. The trustees of the account are not allowed to raise funds against the charges, or sell the charges on to anyone, and the account value is insured against loss, by the trustees. The cost of insuring the account is borne by the insurance company leasing the tranche.

The insurance company that leases the tranche has to make its payments monthly in advance. If it fails to make a payment on time, or gives notice that it is unable to do so, (ie they go bust) the tranche is unpacked and the charges are released automatically.

Even if you start to feel uncomfortable with it all, you can simply give same day notice, pay three months worth of income back, and if your solicitor is very good, you can have your charge released the same day.

The length of term is 3 years. You can renew if you want, or simply walk away.

You can end the contract term early, if you sell the house or die. If you sell the house, you need to give 3 months notice, or lose three months payments. There is a similar exit clause if you pass away.


Costs Involved

All costs are borne by the insurance company, however for peace of mind, I would expect the property owner to have contract examined by their own solicitors for confirmation, and peace of mind. That would be the only cost to the property owner.

The product itself, is very new, and is governed in the same way as a buy to let mortgage, ie the product itself is unregulated, however the process involved is regulated by the FSA, and must be carried out by an independent financial advisor.

It doesnt cost anything to find out about it, and apart from the property owner's costs from independent examination of the contracts, it is a win win situation.

Hope this helps to clarify things. If you need more information about any aspect, I am quite happy to answer them for you.

So I i under stand you correctly the insurer pays for the following -

5% of the value of the equity they hold a charge on
The legal fees
The valuation fees
The IFA's and salespeoples fees (3% of total value of the equity)
The entire cost of the SPV
The escrow accounts fees

and then pays for the cost of insuring the full value of their leased "asset" should they have to realise it?

It sounds like a very expensive way to pretend to have assets they don't have to keep the eu happy.

Ian_W

ygjeeves wrote: »

It sounds like a very expensive way to pretend to have assets they don't have to keep the eu happy.

Now remind me, who was it said "don't invest in things you don't understand"?

Sounds more like a scam than a scheme, for that reason, I'm out!

ygjeeves

Ian_W wrote: »

Now remind me, who was it said "don't invest in things you don't understand"?

Sounds more like a scam than a scheme, for that reason, I'm out!

I tend to agree, my parents have been approached by an ifa offering this and it sounds far too good to be true. I'm going to go to a seminar with them and see what's said but my gut instinct is don't touch with a bargepole.

Penfold12

ygjeeves wrote: »

So I i under stand you correctly the insurer pays for the following -

5% of the value of the equity they hold a charge on
The legal fees
The valuation fees
The IFA's and salespeoples fees (3% of total value of the equity)
The entire cost of the SPV
The escrow accounts fees

and then pays for the cost of insuring the full value of their leased "asset" should they have to realise it?

It sounds like a very expensive way to pretend to have assets they don't have to keep the eu happy.

Thats is correct, yes.

Technically, the insurance copany does actually have the asset, realinsing the asset is virtually impossible.

The only way that they could realise the asset, wouldbe if they carried on making payments to the escrow, which, as we all know cannot happen, if they go pop, as all payments immediately cease.


All insurance companies will have to comply with Solvency 2. Zurich are working on a similar product.