Mythbusting with Alison Gibson
Alison Gibson has a long history in financial services that stems over 40 years and she has seen the good and the bad in the industry in that time. Alison is a Director at Ascot Mortgages, a family-run business established in 2008. During that time, Alison decided that equity release was an area that she’d like to get more involved in knowing that there were quite a few myths out there that people didn’t understand about equity release and she wanted to be out there to help them.
What is Equity Release?
An equity release, quite plainly and simply, is a type of mortgage and it’s an interest only mortgage whereby you can continue to make monthly payments if you so desire. Or you can choose not to. If you choose not to, then that will impact on the remaining equity in the property on an ongoing basis because the interest would be rolling up and it would be ‘capitalised interest’. If, however, you do maintain the monthly interest payments, then you only owe the amount of money that you’ve borrowed at the end of the period when the equity release needs to be paid back.
Myth 1: Is Equity Release Regulated? Is it safe?
Equity release is a very highly regulated product that’s out there in the marketplace. It’s because you are talking to people who are considered to be more vulnerable in the marketplace and, therefore, there are extra precautions that are taken in terms of offering to involve family members, for example, and solicitors having to go into more detail about the proposition that the client is about to enter into, to make sure that they fully understand everything about equity release and how it actually works for them.
Who is the governing body? Is it the Financial Conduct Authority (FCA)? I’ve heard of the Equity Release Council, who manages that?
It’s the Equity Release Council, but also you have to be authorised by the Financial Conduct Authority as we. You have to have specific qualifications to be able to do this type of transaction for a customer.
Myth 2: It’s also called a lifetime mortgage, does that mean that I have to stay in my property for the rest of my life if I were to take it out?
Not necessarily. Equity release is designed to be for the longer term, which is why there is no specific end date on there. However, if you wanted to downsize, for example, then it’s possible to take the equity release with you. Obviously, there are early repayment penalties attached to an equity release if you were simply paying it off in full as a lump sum, but there are instances when those penalties don’t apply either.
Myth 3: You can end up owing more than your house is worth at the end of it, leaving children, family with that debt. Is that true?
The children and the family don’t get left with any debt because if the equity release balance ever exceeded the value of the property, then there is a no negative equity guarantee built-in. Similarly, however, when interest rates were high they used to say that every 10 years, if you weren’t making any monthly interest payments then, typically, the amount that you borrowed will have doubled. But because interest rates now, in some instances, are below 3% for an equity release, then it’s looking more to be round about the 13 to 14 years before your balance would double.
Are there ways to mitigate the increase in balance?
There are ways to mitigate that. For example, you might choose to make monthly interest payments, which means that the amount of money that you borrowed in the first instance remains static. At the point when the equity release is redeemed, then you still only owe that initial sum of money.
What about the roll-up of interest?
In terms of the balance rolling up quite quickly, that is only when you’re not making any interest payments whatsoever. You do also have the option of either making the full interest payment, which means that the balance remains static. Or you can actually do something that’s in between. So, for example, if a monthly interest payment was maybe £300 a month and you could only afford to pay £200 a month, then some equity release providers allow you to do that and just roll up the additional £100. And that would slow down the erosion of the remaining equity in the property quite significantly.
So, how do you reduce the debt?
There are instances where you can make some capital over payments against the equity release without a penalty. They are, typically, 10% of the balance. There are various different criteria attached, depending on which equity release provider you have chosen, however, most of them will allow you to do that up to maybe four times a year, or sometimes even more.
You can also pay off the equity release early without penalty if you were to go into long-term nursing care, for example, and the property had to be sold. Also, as mentioned before, if you were to downsize, sometimes you might be able to take the equity release with you without a penalty, or only have to pay a pro rata penalty if you’re borrowing less than what you owe currently.
Myth 4: Equity Release rates are huge and really expensive, aren’t they?
No, not necessarily because three or four years ago you’d been looking at interest rates sort of 6% or 7% perhaps. Whereas, currently, if we were to look at lending a 65-year-old, for example, the maximum that we could against the value of his home today, and even that interest rate would only be around 5.37%. So, still significantly cheaper than what it was four or five years ago.
As a starting point for Equity Release, the starting interest rates are below 3% currently. So, certainly, they’re similar to a standard mortgage rate in some instances. Also let’s not forget that those interest rates are fixed for the duration of that plan. Unlike traditional mortgage that’s only maybe fixed for two, three, perhaps five years.
Myth 5: Is it true that I’ll lose control and ownership over my home?
No, it’s not. I think where that myth has come from is historically, there was a lot of home reversion plans that were sold as part of the equity release folder. That is whereby you did give up some or all of the ownership of your property in return for that capital lump sum. Whereas, a lifetime equity release is very, very similar to an interest only mortgage. So, the ownership of the property at all times belongs to you.
Myth 6: I haven’t completely paid off my existing mortgage, so I can’t look at equity release?
Yes, you can providing that there’s enough that can be released from the equity, released to redeem the existing mortgage balance. Also perhaps, enough to provide you with the lump sum additional funds that you may or may not require. That’s perfectly fine. Sometimes people also think that it can only be used for a re-mortgage rather than being able to be utilised for a property purchase.
What are the common uses of equity release?
They’re varied. Equity release was typically designed for people who were considered to be asset rich and cash poor. Maybe there were some people who were on low incomes that wanted to supplement their income in their retirement.
Some people have been using it to release deposit funds to help their children get on the property ladder for the first time. I’ve also seen instances where people have been utilising it to pay off some other unsecured credit that may be on high interest rates.
Now, there’s obviously got to be some consideration about whether or not that’s the best advice for people because you’re turning unsecured debt into secured debt. However, if it’s about releasing income, so that you can enjoy your retirement, then it’s a perfectly feasible option for people to use that for. Let’s not forget, you can always use it to do your home improvements or to go on that world cruise that, perhaps, you’ve always dreamed of and never been able to afford before.
What if a client’s circumstances change during the application process? You can’t recommend equity release if it is not, or perhaps no longer right for them?
We do a very in-depth and thorough, what we call, a financial fact find with a customer, and also look at their aspirations, their objectives and their needs.
Sometimes I’ve had people that have come to me and said, “I want to release £50,000 capital from my property,” for example. Then when you delve a little bit deeper into what do you need to use this money for, some people have told me that it’s just for their lifestyle enjoyment.
So, I will always then look to see what realistically it is that they would spend in, perhaps, the next 12 months? It may only be that they plan to spend £10,000. So, in those sorts of situations it’s better to recommend a £10,000 equity release lump sum with a drawdown option, so that once they’ve utilised that initial £10,000 that they’re being charged interest on, they could then draw down further funds. It’s only when they draw them down that they would then incur the interest charges on those additional amounts of money.
What criteria is looked at for Equity Release?
The basic criteria we look at is a person’s age, their life expectancy and the value of their property. It’s for people who’s household income that they’ve got coming in wouldn’t allow them to borrow the amounts of money that they need. Well, that becomes relevant because they have the option to roll up the interest, which means it’s always affordable and the house can’t be taken off them. For any of the children that may be concerned about their future inheritance, however, there’s always the option that the children could make those interest payments for the parents and, therefore, safeguard the equity that’s remaining in that property. That’s something that people don’t always consider.
How long does it take to set up?
With equity release, it’s the initial stages that take the time. Making sure that everybody’s comfortable with what we’re about to do. Once an equity release application goes into an equity release provider, however, they’re normally turned round quite quickly and funds can be released sometimes as early as four or five weeks time.
So when you start, you’re not running straight into doing an application?
We encourage people to have as many conversations with me as they need to before they make their ultimate decision because they need to be 100% comfortable. One of the options I always talk about when I’m looking at an equity release, when the client is in front of me, is you’ve always got the option of doing absolutely nothing.
You’ve got to consider all the alternatives to equity release before you put somebody into such a plan just to make sure that you have covered off all the alternative options, which may involve it being a traditional capital repayment mortgage, for example.
But when the affordability isn’t there or perhaps somebody’s got an interest-only mortgage that’s come to the end of its term and their current lender is pushing them to get this redeemed, sometimes equity release is the answer to making sure that those people can remain in the home that they’ve been in, perhaps, sometimes 40, or 50 years.
What about beneficiaries concerned about their inheritance?
For beneficiaries who may be concerned about their future inheritance, there is something on an equity release plan called an inheritance guarantee and that’s whereby mum and dad can ring-fence either an amount of money or a percentage share of the property that, even when the equity release may fall into a negative equity situation, there is that guarantee out there that either that sum of money or that percentage value of the property on sale is still there for their beneficiaries.
Because sometimes that concerns mum and dad more than it does the beneficiaries. But sometimes it concerns the beneficiaries too.
Can I set that as a figure to ringfence or does it have to be a percentage?
No, you can do either or. Sometimes people prefer to do it as a percentage because, obviously, in a changing market then if you ring-fence, say, perhaps £10,000 today, then in 20, 25, 30 years time that £10,000 might not be a lot of money. So, sometimes people prefer to make it a percentage rather than a figure.