Equity release schemes

amjustagirl

Hi all, i need some advice on behalf of my parents. They have been talking about releasing some equity in their home which is worth approx 200k (mortgage all paid off) They have spoken to Saga who reckon they would be able to release approx 55k for them. I am not familiar with equity release schemes so can someone explain what the risk's are? I don't want my parent's to be financially worse off. They plan to split the money between me and my siblings as they want to help us out and see us enjoy the money whilst they are alive. My dad is still in full-time work and is 63 (plans to retire in 2 years) and my mum is 63 also and works part-time and will retire when my dad does. Thanks in advance.

holly_hobby

I presume your Mum and Dad are looking a Lifetime Mortgage Equity Release Schemes, to which in essence as they re below 65 yrs, there is currently 1 (of 2 variants) available - but I'll explain both.

In all cases the amount of equity that may be released is not based on income, but on the indviduals age (younger they are the lower the amount to be released), and the value of the property.

A lifetime mge typically has interest rolled up on to the initial debt, and is repayable on (in the case of couples) 2nd death or entry into longterm care (although early redemption irrespective of the above, can be discussed). Obv over time the rolling up of interest, will effectively erode the free equity in the property (although there is a provider whom will permit the payment of interest over the term, to effectively ringfence the debt and free equity for the benefit of beneficiaries).

It is also recommended that that a provider whom provides a no-negative equity gte is sought.

The 2nd scheme (available to those aged 65 +) is a Home Reverstion Scheme.

In this arrangement, again based on age and property value, the individual receives a lump sum in exchange for a % of the equity. Now obv, in a rising market this can end up to be quite hefty and at a loss to beneficiaries, but in a falling market the reverse happens (again seek no neg equity gte providers).

In both cases, the capital can be released in one lump sum, or in drawdown payments (ie as, if and when reqd).

A further drawback in addition to equity erosion, is that the release of equity may affect any entitlement to means tested benefits (inc state funded long term care), that they may (or in the future without the eq release exercise), be entitled to. And this should all be assessed by your adviser as part of any recommendation provided.

This is specalist mortgage/financial advice, and as such you need to seek a suitably qualified equity release adviser (as not all mortgage or financial advisers have chosen to be tested and authorised in this area).

You may source suitably qualified advisers in your area by googling Equity Release/lifetime mges of course, a further source may by SOLLA (society of later life advisers) - http://societyoflaterlifeadvisers.co.uk/, Age UK - http://www.ageuk.org.uk/money-matters/income-and-tax/equity-release/, for starters.

Hope this helps get the ball rolling ...

Holly x

ACG

I was talking to my boss about these last week.
I have always shied away from sitting the exam as i had images in my head about elderly women getting ripped off and ending up homeless etc.

Apparently its all changed in the last few years and there are many more rules etc. Its not what it used to be (so i have been told).

Thanks for the reply holly, its helped me also.

bigadaj

If your parents wanted to spend the money I could understand it, however giving you the money now is quite odd. The effect of rolling up interest and compounding means that, dependent on the scheme, there will be no estate left to inherit within a relatively short period of time. This means that the fifty five grand now replaces the whole house value in say twenty years, understandable if your parents w aged to spend now but less so if it is simply to give to children.

I'm not sure how it would affect benefits, but logically it shouldn't make a difference on mean stressed benefits as the house equity has been effectively swapped for the sum, deprivation of capital could be an issue in future should your parents go into care though it sounds as this might be many years away.

They need to look into the schemes in detail, get advice and post back here with exact details such that people could have a better idea of what they are exactly thinking of.

holly_hobby

No probs ACG, any help I can give just shout, as although I've been ER and LTC qualified since the qualifications launched, I don't advise the public, but instead act in an auditory role instead.

I completely understand your comments, the impression of the lifetime mge market took a severe beating with the prev equity release schemes and (in quite a few cases), completely inappropraite advice given including a complete ignorance of the impact on MT benefits and even if ER was necessary (ie - if an income based exercise, the adviser should primarly ensure that the indvidual is in receipt of all qualifying benefits and sources of due income, BEFORE any ER advice is considered or given). This was often ignored due to lazyiness, greed or just pure ignorance in keeping abreast of state benefits which have an impact on financial/mge advice.

Athough SHIP (now the Equity Release Council), have always been a presence in trying to drive standards, there are further advances, such as SOLLA, whom I mentioned, whom give details of advisers whom not only have the relevant qualifications, but have also chosen to be independtly assessed by an external examiner as to their proven proficiency in the actual application of knowledge and skills in this area of advice - bit like being Corgi registered if your a gas fitter. (before anyone picks me up, yes I know its not called Corgi any more .. its to illustrate a point !).

Its a area of advice that is rapidly growing, and with the extended life longevity we are seeing, there are more and more asset rich cash poor older people, whom are seeking such advice. There is however a shortage of good advisers, whom like you are nervous about the conatations (given the general reputation), but this is exactly the type of adviser thats needed in the ER and Long Term Care market, conscientious, dutiful and responsible.

Re-consider taking your exams .... you'll not only open up a whole new market of advice to you, but will be providing a relevant and valued service in my opinion.

Hope this helps

Holly

holly_hobby

bigadaj wrote: »

I'm not sure how it would affect benefits, but logically it shouldn't make a difference on mean stressed benefits as the house equity has been effectively swapped for the sum, deprivation of capital could be an issue in future should your parents go into care though it sounds as this might be many years away.

Not unreasonable to think that, as whilst the value of the primary residence (unencumbered or not) is excluded from any MT assessment, capital released out of it (via an ER exercise) is NOT - as this is actual capital available to the individual (whether they elect to donate it elsewhere or not).

As such the relevance and any impact this may have, must be considered within any ER assessment and advice given by an ER adviser.

Hope this helps

Holly

bigadaj

Holly, don't you think this has the potential to be the next big scandal though.

Things have massively improved since a few decades ago, but he cost of these schemes are huge due to the co pounding effect and the lack of repayments. Equity is wiped out very quickly and I'm sure the press will be pushing this as the next endowment or similar financial services scam.

My partners aunt and uncle completed a similar scheme fifteen or twenty years ago. They both subsequently died within a few years, even though they were in their early sixties, and a s they had no children it was probably a good deal. Interestingly the will stated leaving assets to nieces and nephews, and Barclays were challenged on this and subsequently repaid some back into the estate.

Conversely with the rise in life expectancy could we see banks taking massive hits when so many people become centenarians.

holly_hobby

Well unfortunately, its already been the subject of a scandal, and the particular Barclays arrangement you're talking about was called a Shared Appreciation Mortgage (SAM), and the subject of a failed class action.

Whilst as I said earlier, there are now providers whom will permit the payment of monthly interest (either wholly or partly), in order to effectively ring fence the debt and free equity, not withstanding market movements of course (and which obv isn't applicable to Home Reversion Schemes).

The problem with SAM and other similar arrangements, were not that they were mis-sold (hence the failed action), but that the property market exploded beyond anyone's expectations during the period they were popular, and as the loan was based on a % of the equity, the impact of a rising property value, obv impacted on and increased the value of the effective equity held by the lender (and effectively sold by the individual in exchange for the capital recd). And in a lot of cases the return the lender was due, now signifcantly exceeded the original advance as a direct result of the rapidly rising market ..... hence unhappy mortgagors and families of those whom entered into such schemes.

But to be fair, what must also be considered is that if the market had collapsed to the same extent and as quickly as it grew, the lender would have been disadvanataged ..... so it did swing both things .... so essentailly wasn't assessed as being unfair, which is why the action wasn't pursued.

After this scandal and that of poor and inappropriate advice, many lenders withdrew from the market, with the emergence of todays providers being a farily recent event.

Indeed, it was after the huge issues regarding this and the reputation of such schemes and advisers, and in order to offer protection to the public and increase consumer confidence, the industry launced Equity Release and also Long Term Care qualifications (which I think go hand in hand when giving advice to this age group).

As stated in my orignal post, the erosion of free equity over time and how that may impact on any beneficiary needs to be strongly considered as part of the exericse, and indeed the responsible adviser will ensure that children or other beneficiares are always included (or at least invited to be so) in advice and discussions.

I don't think ER is suitable in all circs, I think its very much based on circs and the exhaustion of any other solution ..... whether it will again be the subject of a consumer issues or a mis-selling scandal, I hope not given the strives that the industry are going towards to eradicate this and poor advisers, and the qualified and audited advice facilities now open to consumers.

I'm not banging the ER drum, really I'm not, but I do think that its a valuable option and solution to certain individuals with particular needs and circumstances.

Hope this helps explain

Holly

amjustagirl

bigadaj wrote: »

If your parents wanted to spend the money I could understand it, however giving you the money now is quite odd. The effect of rolling up interest and compounding means that, dependent on the scheme, there will be no estate left to inherit within a relatively short period of time. This means that the fifty five grand now replaces the whole house value in say twenty years, understandable if your parents w aged to spend now but less so if it is simply to give to children.

I'm not sure how it would affect benefits, but logically it shouldn't make a difference on mean stressed benefits as the house equity has been effectively swapped for the sum, deprivation of capital could be an issue in future should your parents go into care though it sounds as this might be many years away.

They need to look into the schemes in detail, get advice and post back here with exact details such that people could have a better idea of what they are exactly thinking of.

The reason they want the money is one of my sibling's want's to get on the property ladder now as he is 32 and is concerned he will never get on, also now is a good time to buy with the drop in house prices but he does need help with a deposit. I have debt from another house that i had to sell that was in negative equity, it was a big financial risk so i had to get rid as soon as i could as i only work part-time now on a low income due to having a family now. They basically just want to help us out but i obviously don't want it to detrimental to them.

holly_hobby

Completely understand...... and this is exactly the approach that should be taken, cautious, ensure you know and are happy with all contractual t&cs, before you dive in ...

Anyhoo, you now have the basic facts as requested, so the next step for you and your parents is to speak to a qualified ER adviser, crunch some figs, and my advice (as I would hope will be that of your adviser), is to only consider providers whom are a member of the Equity Release Council (which as I say was formerly SHIP - Safe Home Income Plan, and held for voluntary members basic standards of advice, care and no neg equity gtes, way back before the industry even had qualification requirements).

Just to conclude, I see that there are a couple of areas they wish to help you children out with, but given their relatively young ages for such a scheme, they are at present generally looking at a ballpark max release sum of circa £55k, which may or may not be suitable or sufficient ..... as I say your adviser will guide Mum/Dad and those whom want to be involved (and should positively welcome the request, for you to be present at any appointments held with your parents).

Hope this helps ..... let us know how you get on ... !

Holly x

Let_Us_See

amjustagirl wrote: »

I am not familiar with equity release schemes so can someone explain what the risk's are? I don't want my parent's to be financially worse off.

Your parents will be worse off if they decide to reduce there financial assets by £55,000. How can they not be? Unless they have planned for substantial pension income in retirement then their home will probably be their main financial asset and any early release of equity (plus compounded interest) may limit their future ability to release additional equity to subsidise/improve their standard of living in retirement.

Having said that I will admit to being a firm believer in the benefits of lifetime mortgages where used prudently. To some degree there are two schools of thought concerning lifetime mortgages (I am ignoring Home Reversion schemes are they are rare as hen's teeth). Firstly, a "home is a castle" and should be defended at all cost for the children to inherit - even if it means just survival with no real standard of living. Secondly, a home is a financial asset (without doubt the largest in retirement) and should be used accordingly to maintain or improve, not just standard of life, but other treats too (SKI- ing - Spending Kid's Inheritance, is increasingly popular). In truth I can understand both views, but it is amazing how many children only support the former as they believe it is their absolute right to inherit from their parents.

By all means explore the options for releasing £55,000 of equity, but also consider and discuss how this may affect your parents' options in 10 - 15 years time?

Finally, if your parents decide to proceed there is no need to worry about future means tested benefits as they are not increasing their income.