Equity Release: Fair fees and commission?

GrippyScot

I'm sorting out Equity Release on behalf of my dad.

I've used 2 registered advisors so far, to have some kind of due diligence on my part.

(For reference this is to release £100K against a £500K house which has no securities and dad is a fit 80 year old).

There's something just a bit "off" about it all - like in years to come a financial scandal will be revealed...

Firstly, I have had to literally spend hours explaining our financial situation, under the veneer of it being for "our protection". There are only really two elements to consider - the interest rate and the fees. I'm financially astute (as is my dad, a former accountant) so we understand how compound interest works. Yet round and round we go. (Don't get me wrong, I know there are many out there that would find the principles complex - I'm just saying that's not us.) This is exacerbated by the fact a lawyer has to be engaged not only to lodge the security and sort the legals, but "who'll act in our interest, to explain it to us again, and make sure we understand". 

There's also the fact that the advisor needs to "go away and research our situation and then come back with a quotation". Once again interest rate and fees is (in our situation, with no leasehold or other complexities) are all I need to know. Smoke and mirrors.  I finally found an online portal that would show me an instant rate - like you would with a normal mortgage. The advisor comes back after his "extensive research" to quote me pretty much the same rate as I'd found myself.

The fee quoted is around £2000. At first this seemed high for the amount of work that's involved in our case. HOWEVER, I accept that the advisor's company has costs (such as the house survey) that they have to bare the risk for if we change our mind. And as mentioned I've engaged two advisors, so they're both investing time that only one (or neither) will get paid for.

HOWEVER, buried on the last page is a note that the lender will give the advisor's company £5K in cash and or benefits. That makes the fees not £2K but £7K - and the only way the lender can afford to pay out that kind of commission (a whopping 5% of the principal) is by adding that cost to the interest rate. But since they all seem to operate like that, it strikes me that there is not fair competition in this market. 

It is just so time-consuming to go through the process that we'll probably just end up paying the fees, paying their appointed lawyer and paying the 6.8% APR (not the lower rate that is used on all the literature). It's a lot of return for very low risk. (the only risks are inflation and a catastrophic housing market crash - and while they are there, I don't think the rates fairly reflect that very low risk).

Sorry I know there's a lot of competing thoughts here - I know advisors are not responsible for the rates the lenders set, for example - but it just all seems fishy, and I would be interested in the thoughts particularly of equity release advisors to tell me I'm wrong and maybe slightly paranoid?

ACG

Is the £2k to the broker or the lender? If it is to the lender the broker does not see any of that. 

Whilst you and your dad might be in a good place to understand numbers, what you have to understand is that equity release originally resulted in a lot of people being conned out of their homes. It is now heavily regulated and understandably because they (I am not authorised to do equity release) are dealing with more vulnerable people - your dad is the exception rather than the rule. 

The lender will not see any return on their investment for years. You say your dad is fit and healthy so they may not see any return for 2 decades! What happens if a train line (like HS2 as a bad example) or a wind turbine or a housing estate is built in the back garden? That will affect the property value. 

It is so heavily regulated that you think there will be a miss selling sandal?! That makes no sense. The income the broker receives as you say is the same from all lenders so its not like that is affecting their decision. 

There are a lot of people involved to protect vulnerable people. The processes are set out like they are because you are more likely to be vulnerable and have kids complaining 20 years down the line when they realise their inheritance has gone. All of these safeguards protect the applicant and protect the broker from a complaint down the line. 

MyRealNameToo

Look at all the threads on here about equity release mortgages and you'll see you are clearly in a minority thinking that the talk is excessive when all the other threads are about people saying they or their parents didnt understand it. 

There is also a longevity risk in lifetime mortgages, in part why most lenders are life insurers. Most are capped at the value of the property so if your customers all live too long and house prices stagnate you may be writing off a significant amount. 

I've no idea the average commission on a lifetime mortgage but obviously normal mortgage brokers also receive commissions based on the size of the mortgage. Principles are going to be lower given the LTV is much lower and yet work to do the deal are probably higher. Volumes are much lower so less business to go round and almost certainly there is a much lower completion rate and there is no commissions paid for deals that dont go through. It's also a more heavily. Would imagine regulations are heavier given the higher proportion of vulnerable customers and so too rate of complaints about miss-selling which come with a cost irrespective of if the complaint was justified or not. 

dreaming

Having recently undertaken my own equity release I understand that the process can seem like overkill, especially as I had worked in financial serices for many years and had already done a lot of my own research too. However, I believe that much of what is required is actually to protect both sides of the transaction from a mis-selling scandal in future years. Although I have no reason to doubt your knowledge, or your father's, but I found there were one or two "rules" that had changed since I retired so it was good to have those clearly explained. The mortgage provider too has to be certain that it has been laid out so the mortgagee fully understands what they are committing to. After all, the provider does not know anyone's level of knowledge and understanding (again - not doubting you in this case) so the financial advice can offer some protection for both sides. I have seen a few posts on the MSE site regarding people getting into large amounts of debt and questioning whether they can challenge the affordability of loans and credit cards. Whereas I know that some banks can seem to hand out cash willy-nilly (and so should be penalised), I also know that terms and conditions are laid out for the borrower to read but so many people don't seem to read them fully, or even at all. They just see the £ signs and then realise they are totally over-committed. The fees etc. can seem quite high at times but those are obviously market prices and you can often negotiate them or go somewhere else.

dunstonh

Firstly, I have had to literally spend hours explaining our financial situation, under the veneer of it being for "our protection".

Equity release is considered an option of last resort.   So, it is correct that it is for protection.
It also protects the all those in the chain of distribution too as its far too commonplace for children to complain when they find out they are not inheriting as much as they thought.  Those children claiming their parents didn't know what they were doing blah blah blah.

Sorry I know there's a lot of competing thoughts here - I know advisors are not responsible for the rates the lenders set, for example - but it just all seems fishy, and I would be interested in the thoughts particularly of equity release advisors to tell me I'm wrong and maybe slightly paranoid?

You need to remember that fees do not equal profit.   
Equity release requires additional qualifications.  It requires additional FCA permissions.  It requires the PI insurer to cover them and they are very time consuming.    It is also a high risk area so liability risk is high.    All those things add cost. 

There's something just a bit "off" about it all - like in years to come a financial scandal will be revealed...

It is hard to see how regulations protecting consumers could be turned into a scandal.  Especially because the protection exists because of previous scandals.

MWT

There used to be a 'no fee' alternative for equity release advice via StepChange, but it seems the income from the lenders alone did not make the service viable and they closed it down recently...

I know how you feel, I went into this process with the same attitude, and although annoying there were a couple of useful comments during the process, details like the exact point at which interest rates changed in relation to the LTV percentage, so a small trim on the amount I was looking for made a meaningful difference.