Christina Jordan argues that lifetime mortgages and reversion schemes are transparent, flexible and useful for many older homeowners.
Even with the recent softening of the housing market, house prices have still risen a long, long way since the early 90s. As a result many older people find that they're living in a valuable asset (their home) but don't have much other money.
Understandably many pensioners don't want to downsize and move to a smaller home, but they would like to unlock some of the value of their prime asset so they can enjoy their retirement more. Equity release schemes allow pensioners to do this.
However, on the downside, these schemes have received a lot of criticism in the press over the years, including on this site. But I believe that equity release is a useful tool that has been unfairly maligned.
Don't get me wrong. For some people there are other options:
- People can consider downsizing instead, but it's not always appropriate
- There might be extra benefits and grants they are entitled to that could solve their financial problems. Or there might not...
- And yes, people can ask family and friends for financial support. But the friends and family might say no.
The truth is that with an ageing population and pensions shortfall, there is no plan B for many people. Equity release plans are here to stay and I believe they will become a common feature of the financial landscape over the next 20 years.
Times have changed
The products are now much more flexible than in the past and providers are constantly developing equity release propositions to meet consumers' needs. For example:
- If you take out a lifetime mortgage ( a type of equity release scheme), you do not need to take a lump sum and pay interest on it for the rest of your life. You can drawdown money as and when you want it, which keeps your interest payments down and means that you only take money you really need. In the first three months of this year, well over half of equity release products were taken out on this basis.
- You might think that all equity release schemes don't fully value your home. But Retirement Plus has a home reversion scheme that does just that, for a share of their property at the start of the plan. In return you grant the provider an option to buy an increasing beneficial share in the property over the life of the plan.
- Equity release products are now available to those with health problems, offering higher cash sums than standard providers can usually provide.
- Lifetime mortgages are available without early repayment charges. Godiva (part of Coventry Building Society) offers such a product, taking away the assumption that equity release has to be a long-term commitment.
How safe is it?
In order to give advice on equity release, brokers must be regulated, work within clear rules and have passed an extra qualification in lifetime mortgages and reversions on top of their mortgage exams if they want to advise on any SHIP member products.
Advisers must:
- Give lifetime mortgages and home reversions equal consideration
- Look at how an equity release plan would affect the borrowers' entitlement to mean- tested benefits and other State support
- Check whether accessing money from another source, including local authority grants, investments or savings would be more beneficial to the client.
In addition, SHIP members all sign up to a code of conduct above and beyond statutory regulation.
- They must allow the customers to use an independent solicitor of their choice that will explain to them the legal ramifications of equity release, and the importance of involving family members in the decision.
- Their products must carry a no negative equity release guarantee, meaning the customer's debt will never be more than the value of their property
- They have the right to live in the property for life and all SHIP products are portable if they want to move house.
The Financial Services Authority recently conducted research into the sale and advice-giving process in the equity release sector with extremely positive results, as most consumers said they fully understood the risks involved with the products.
Equity release products are by no means a fix-all solution and are wholly unsuitable for many people. But they are worth considering and should not be confused with past schemes that are a world away from today's products. Just make sure you provider is regulated and a SHIP member.
For an altenative view on equity release schemes read Jane Baker's article from last year.