Equity Release Mortgages

Are they good value for money?

Equity release (or ‘lifetime’) mortgages are a form of borrowing which enables older home-owners to raise a ‘cash’ lump sum and/or an income which can be used for a number of purposes ‐ the most common typically being lifestyle improvement, inheritance tax planning, supplementing pension income or to meet care and other needs.

After being criticised in the past as being expensive, inflexible and risky, not only are today’s equity release mortgages almost unrecognisable from the schemes which existed in the 1990’s, they are also very tightly regulated by the FSA (Financial Services Authority) and, in addition, the majority of providers also elect to meet the exacting standards of the trade body known as SHIP (Safe Home Income Plans).

Whilst the much vaunted ‘credit crunch’ has, for the time being at least, reduced the number of providers lending in the equity release market, there are still several well known companies offering a range of schemes in response to the increasing number of retired and elderly home-owners waking up to the huge potential that these schemes offer.

Two major problems with this area are:

  1. the lack of Independent Financial Advisers (IFAs) with the relevant qualifications
  2. the fact that these products are only suitable for elderly people (most require applicants to be over 60 – although some now start at age 55) and it is a real concern as to whether elderly clients really understand the choices available to them

However, equity release products have started to become more flexible and, in some ways, less complex and now come in just two main categories ‐ ‘Home Reversion Plans’ (where you sell all or part of your home to the provider) and several different types of ‘Lifetime Mortgages’ where you retain ownership of your home with the interest either rolling up or being paid monthly. Most plans come with the ability to include a drawdown or ‘cash reserve’ so that funds need only be drawn down when required, thereby avoiding interest being charged on money which is not actually needed or not spent immediately.

Are they good value? Which is the right one for you or your elderly relative (if any)? Only a qualified and experienced IFA can advise you. It is crucial to find an IFA who can advise on the choice available.

Clients considering equity release should include the following in their deliberations:

  1. what other options are available (e.g. downsizing, cashing in investments, borrowing from family, claiming grants/benefits, debt advice)
  2. the costs and any future early repayment charges involved
  3. does the plan they are considering confirm to the principles of ‘SHIP’
  4. whether their family or beneficiaries should be consulted
  5. has the adviser taken the time to explain both the advantages and the disadvantages

The temptation to have cash-in-hand can make people overlook some of the expenses and complexities inherent in these products, and they may come to regret their rush to enter into these arrangements if the disadvantages, literally, hit home.