Is Equity Release Making a Comeback?
In years gone by, Equity Release had a massive image problem following various scandals in the 1990s about poor products, expensive charges, high interest rates and negative equity risks leaving beneficiaries with debts to deal with at the time the homeowner passed away as if that wasn’t stressful enough!
But that said, is it time to revisit Equity Release and consider it as an integral part of your later life planning?
Changes to regulations following the issues in the 1990s means Equity Release products are now subject to stringent rules to protect the consumer, which has pushed up standards. Over recent years, there has been more competition in the marketplace, and this has led to a good range of products and interest rates falling significantly – but we will discuss more on that later.
Equity release is no longer the act of desperation when all other assets have run out. It should be viewed as another product in the armoury to see you through your later years. We also use it with estate planning when the family home may be the biggest asset in the estate, and clients don’t want to move or “downsize”. having lived in the house for many years with all the family memories it has.
So, what exactly is Equity Release? Think of it as a mortgage on your property that you make no repayments on. Interest rolls up on the capital amount and the debt is repaid when you pass away or go into long term care. For a married couple it is repaid when the last survivor passes away or goes into long term care. The amount you can raise is limited to a percentage of the property value based on your age.
So, why is Equity Release beginning to make a bit of a comeback? As defined benefit pension schemes all but disappear in the private sector, it is expected that property wealth will become the largest component of many household’s wealth in the coming years. Property as an asset class, has performed spectacularly since 1990 thanks to a collapse in interest rates (Bank of England Bank Rate), from an eye-watering 14.88% in January 1990 to the historic low of 0.1% today. The average UK house price has increased from £57,086 (Jan 1991) to £223,773 (March 2018) over this timeframe.
While defined benefit pension schemes still account for the vast majority (80%) of private pension wealth, by comparison, the amount in defined contribution pension schemes is very small. The average defined contribution pension pot is £44,000 (as of March 2018), providing nowhere near the income expected or indeed needed in retirement.
If clients want to have a comfortable standard of living in retirement and use their resources to their meet financial need, then it is possible that soon, Equity Release will become commonplace. Fortunately, the quality of Equity Release products has improved dramatically over the past few years.
We asked our partners at Raffingers Wealth Management to give us the low down on the product standards in the marketplace and some of the key benefits of these products. Laurence Daley, an IFA we work closely with here at Raffingers, points out the following:-
Currently, over 90% of products on the market meet Equity Release Council Standards; created to improve the image of Equity Release and increase consumer protection. These standards ensure the following:
Lifetime mortgages interest rates must be fixed or capped.
The borrower has the right to remain in the property until he / she dies or moves into long-term care.
The borrower has the right to move to another property and take the loan with them (provided the new property is acceptable as security for the loan).
The product must have a “no negative equity guarantee”, meaning that neither the borrower nor the borrower’s estate will be liable to pay any shortfall that may exist when the house is sold, and other legal fees are paid.
Some of the key benefits of the current Equity Release products on the market are:
Inheritance protection. Where the value of the final estate is guaranteed.
Drawdown products. Where the loan is initially underwritten (approved), but funds are only taken from the property when needed. This minimises the impact on the estate and can be used with pensions as an efficient form of tax and investment planning.
Buy-to-Let Equity Release. Where buy-to-let properties can be used to provide funds as well as the principal primary residence.
Interest rates have fallen from approximately 6% to 3% for the average loan over the past 5 years.
We also see Equity Release being used more and more in estate planning as well as its traditional uses. Although not generally considered to be a first solution for Inheritance Tax problems, it can be useful for those who wish to make lifetime gifts to their children, if the current value of their estate would lead to an inheritance tax liability. Through this, funds can be provided while the donor is alive to enable gifts to be made, reducing the ultimate IHT liability on the estate. Advice is needed here, however, to ensure other reliefs are not affected – talk to us for the holistic view.
So, Equity release when part of an overall financial plan can be a powerful tool to help meet your financial planning needs. The key thing to remember is that it should be part of an overall financial plan and not a standalone product. It is important to consider the risks and benefits and to examine these in detail as part of any strategy. When used with pensions, care fees and cash flow planning, Equity Release can help produce a comfortable standard of living in retirement.
It is important to talk to a qualified financial planner who will ensure it’s used correctly, informing you and your beneficiaries about its benefits and impact on their inheritance.
As defined benefit pensions disappear and small defined contribution pension pots prove insufficient for a comfortable retirement, then equity release may become more commonplace. Sadly, those expecting a large inheritance from their parents’ property may need to temper their expectations!
Talk to us if this may be of interest and one of our Raffingers Wealth Management financial planners will be happy to take you through the detail. As stressed above, it is important to ensure you seek proper independent advice before making such decisions.
To find out more about Raffingers Wealth Management, click here.
To speak to one of our financial planners, please get in touch with Paul Dell at firstname.lastname@example.org or by calling him on 0203 146 1606.
Raffingers Wealth Management is a trading style of Tavistock Private Client Limited which is authorised and regulated by the Financial Conduct Authority. FCA Registration 210782. Tavistock Private Client Limited is a wholly owned subsidiary of Tavistock Investments Plc. Registered Office address is 1 Bracknell Beeches Old Bracknell Lane Bracknell RG12 7BW. Registered Number 04298592. The FCA does not regulate tax, estate planning or cash flow modelling.