Equity release

Ask Eddie

8 March 2008

Eddie answers:

The statistics speak for themselves – the UK has a growing retired population. There are currently more than 11 million pensioners in the UK and this figure is expected to rise dramatically from 2021 onwards.

With this in mind, brokers are right to look at the opportunities that equity release has to offer. After all, the equity release sector is well placed to prosper in 2008.

In 2007, the total value of new business reached just over £1.2 billion – a 5 per cent increase on last year’s figures – while the number of new policies sold rose to 5.5 per cent from 27,772 in 2006 to 29,293 in 2007. Against a backdrop of uncertainty in other markets, equity release is proving more robust in these conditions.

That said, it is a complex area and one in which there have been many accusations of mis-selling in the past. So it’s important to ensure that you have the facts to hand before giving advice.

Understanding the market

Safe Home Income Plans (SHIP) is the best source of information on equity release.

Formed to promote high standards and good practice for equity release products, SHIP was set up in the 1990s to safeguard against the problems that many had encountered. For more information, visit www.ship-ltd.org.

It is important to fully understand the differences between lifetime mortgages and home reversion plans, both of which are now regulated by the Financial Services Authority (FSA).

With lifetime mortgages, there are no other mortgages on the property and the borrowers have to be at least 55-years-old.

The owner takes a loan out against their property, which is given by the lender as a lump sum, and interest is charged as usual.The borrower does not have to pay back the loan or interest until they either die or have to go into full-time care.

At this point the lender makes a charge against the property and claims back its loan and all the accumulated interest from the proceeds of the sale of the house, with the remainder of the proceeds going to the borrower’s estate.

With home reversion plans, the home owner sells off a percentage of their property to the reversion company for a fixed, one-off lump sum payment.

In return, when the owner dies or goes into full-time care, the home reversion company takes their percentage of the proceeds of the house sale, which will include any profit they have made from the increase in the value of the property.

Scrupulously compliant

Because brokers are dealing with the elderly they must be scrupulously compliant not only with FSA regulation, but also by following advice and guidance published by organisations such as the Council of Mortgage Lenders and charities.

The following guidelines should help when advising your clients:

• Be prepared to take much longer to explain the products available.
• Be conscious and respectful of the client’s age. Elderly clients are often anxious before entering into major financial obligations. Patience, plain language, a full explanation and time are essential in reassuring clients in these cases.
• Any products you sell should belong to SHIP-approved schemes.
• Lenders’ quotes must be clear, with illustrations showing how the outstanding loan balance increases over time.
• Inevitably, the value of the client’s estate will be reduced, so their children and other beneficiaries of their estates should be involved from the beginning.
• Welfare benefits may be affected when entering into such a scheme.
• Clients should instruct an independent solicitor experienced in equity release cases. The lender will require the solicitor to sign a SHIP certificate confirming compliance with SHIP’s Code of Practice before any funds are released. As such, the solicitor instructed should have the specialist knowledge necessary to conduct such a case and be able to provide the clients with clear, unambiguous advice.
• Advice should also be sought by the client on whether or not to make a will.
• Remember to bear in mind that the knock-on effect of equity release on a customer’s individual circumstances can be much greater than for a standard mortgage, impacting on their tax liability, any benefits they might be claiming, as well as their personal and family life.
• In terms of timescales, it is best to be realistic. Most remortgages will complete within 10 days of the solicitor receiving the offer of mortgage, but this is highly unlikely in a lifetime mortgage case due to the nature of the transaction and the involvement of two sets of solicitors. Four weeks from receipt by the client’s solicitor of the offer of loan should be more than enough time.
• Communication is paramount. Build a good relationship with all parties to ensure smooth progression.