This week’s podcast explores why equity release has a bad name, with thoughts from Craig Skelton and Mark Thompson.
Why has equity release got a bad reputation?
It didn’t have a bad name to start with, but it developed one for failing customers between the 1980s and the early 2000s. When these products first came out, they had variable interest rates instead of the fixed rates we’re used to today.
Some people were taking these variable rate loans and investing the money in other investment opportunities. They were leveraging their house to invest in business opportunities. And then of course, as we know, interest rates started going up. Bearing in mind that people didn’t have to pay back the interest, its compound effects plus rates going up meant it wasn’t long before people ended up with no equity in their homes.
Next, property prices started falling. People started getting into negative equity situations, where they owed more than your property was worth. It meant that people who passed had nothing left in their estate – so you can imagine how that impacted people’s perceptions of equity release.
How was that allowed to happen?
It’s easy to forget that it was a much less regulated world in the 1980s and 1990s. Today, we’re governed by the FCA where the focus is on doing the right thing for the customer. People used to be able to do all kinds of things before the regulators were set up.
Property prices were going down, interest rates going up and people were investing their equity in the stock market … who thought that was a good idea?
The problem was that nobody, including the financial institutions, was giving clear thought to how the contract terms would impact on clients in the long term. That was the problem. It was all about today rather than about tomorrow.
Where do home reversion plans fit into this?
Equity release in its early form usually meant home reversion plans, rather than the lifetime mortgage that we focus on today.
With a home reversion plan, mum and dad might sell their house to a company for a return. It might be just part of the value of the house, with the ability to live in it for life, or the whole home. They were disposing of their main capital investment.
And of course, children were then finding out, after a parent’s death, that the house they thought they would inherit is now owned by a financial provider. That hit people very hard.
What’s interesting, though, is that the negative reputation has come from those people – the ones who lost their inheritance. We don’t hear from the people that benefited from the money – that perhaps had a much better retirement thanks to their equity release.
Home reversion plans hardly exist at all today. Instead, we have the lifetime mortgage where you never lose ownership of your home.
When did home reversion plans stop being the main form of equity release?
It was around 2007 that equity release and home reversion plans became regulated and that was the beginning of the end. We don’t advise on them today and the numbers have dwindled to virtually zero.
People do ask, why would anyone want a home reversion plan rather than a lifetime mortgage? With lifetime mortgages you’re not signing your house away, your estate is always your estate. But with a home reversion plan, people could potentially raise more money than you now can with a standard lifetime mortgage.
Now, out of thousands and thousands of equity release products there are only one or two reversion plans. There aren’t many situations where home reversion would be a good choice.
So is equity release a safer choice today?
Often when I speak to a client, they have barriers up against equity release. They’ve heard it’s such a bad thing. But once I explain how it works, those barriers come down. People suddenly understand it, ask what’s wrong with it and want to understand why people are so against it.
The thing is that the product just isn’t the same today. The Equity Release Council was formed in 2012 and started recommending changes to protect the consumer. Things have continued to change ever since. We follow their guidelines, which are very good, and include a checklist of all the things that an adviser should cover off under the regulations. Even in the last couple of years, that checklist has virtually doubled in size.
The big difference is in what we said at the beginning – it’s crucial to think about the future for the client. Now, the focus is all about that, making sure that the customer knows what to expect in 10, 15, 20 years’ time.
So when you hear that ‘equity release is a scam’ – just think about it. If it were a scam, the FCA would have shut it down years and years ago.
Equity release today is ultimately a good thing for the right people. It’s the only option for some people to do what they want to do and still own their own home. The FCA recognises the need for this product.
What protections are in place on equity release today?
There are various Equity Release Council standards to protect people. They include:
Lifetime mortgage interest rates must be fixed.
All lifetime mortgages are fixed for life. One provider does currently offer variable rates, but it has to set a fixed cap for the life of the loan. With a fixed rate, clients know exactly what the rate is going to be. You can choose to service the interest if you want to, or not. So we can illustrate what you will owe after day one, in year ten or year 15, if they pay the interest or not.
Now, clients go into it with a full understanding. They have a set interest rate for life or until they move into long term care.
You can take your lifetime mortgage to another property.
You also have the ability to move to another property and take your lifetime mortgage with you – assuming that other property is suitable security. It means you’re not stuck in a certain house with equity release.
The No Negative Equity guarantee.
With modern equity release products, in the end, if the property is sold and if there’s not enough to repay the outstanding loan, neither the client nor their estate is liable to pay anything more.
This is really important. At the moment, with the way interest has been fixed at low rates and the way property prices have risen, nobody’s getting anywhere near negative equity. But with this guarantee, you’re never going to leave a debt behind.
The ability to make repayments
With any plans you take out, you have the right to make penalty-free payments. We call that servicing the loan. As with a standard fixed rate mortgage, you can pay up to 10% per year without penalty.
So if I owe £100,000, whatever my interest is, I can pay £10,000 off per year if I choose to. Some clients take equity release and their children decide to pay the interest, and keep the estate going that way.
How can you overcome the negative stigma about equity release?
It really helps to bring the whole family into the discussion. The first question I ever ask a potential customer is, who is getting involved in this? Can we invite your children along?
We encourage them to be involved so they understand. As I’ve said before, there are many times where I’m approached by a client’s children who want reassurance about what’s happening. If they’re informed, there’s no additional shock when a parent passes away.
And why wouldn’t you tell your children what you’re doing? You don’t have to get their agreement – it’s your own home, you’re the parents and you can do what you want with your money.
For many of us, our children are better off than we ever were at their age. Often they would prefer us to enjoy our last few years rather than scrimping and saving for them to inherit a bit more money at the end of the day.
