Silver lining for equity release

While the credit crunch has had a huge impact on the traditional mortgage market there is now real opportunity for equity release says Jayne Almond

A drying up in the number of available conventional mortgages and mortgage products, and increasing lenders' margins, has made life difficult for homeowners and advisers.

This year, some 2.76 million homeowners are coming off fixed-rate mortgages with an average rate of 4.8%, and are facing a move to significantly higher rates.

With tough times forecast to continue, the flexibility offered by new generation equity release products gives both home owners and advisers light at the end of the tunnel.

Refresh knowledge

Brokers who have not kept abreast of product innovations, yet have an aging clientele carrying debt, should look to refresh their equity release knowledge.

Some of these customers will be over 55 and with a loan to value ratio low enough to consider a lifetime mortgage. Lump sum products can give them access to funds to clear the debt and move into retirement with certainty and less stress.

The lifetime mortgage interest rates, fixed for life, start from a highly competitive 6.12%, including an interest only version at an attractive rate of 6.42%, where the client elects to pay the interest each month to avoid the roll-up of interest.

In addition, some lifetime mortgages come with a number of important safeguards for homeowners which are not available on traditional mortgages. Many of these safeguards are common to all products from providers who are members of SHIP. These include, for example, a 'no negative equity guarantee', so there is never a risk of the homeowner owing more than the value of their property.

Safety net

Some interest only products have a specific safety net whereby, if the homeowner misses an interest payment, or opts not to make payments, the product converts to a conventional lifetime mortgage whereby the interest is added to the loan and rolls up, and the capital plus the rolled up interest is repaid when the homeowner either dies or moves into long term care. Thus, these providers will never repossess the property because the client cannot keep up repayments. With a traditional mortgage, interest has to be paid on the loan every month or the homeowner faces the risk of losing their home.

Lump sum products can be used to pay off, for example, outstanding mortgage balances and debts, such as credit card debt, which are carrying increasingly high interest charges.

It's time for mortgage brokers, financial advisers and the media to weigh up the merits of equity release products against traditional mortgages in today's environment. We're not saying it's right for everyone, but there are homeowners out there for whom it is absolutely the best option.

Conventional mortgages

- Interest has to be paid on the loan every month;

- If they fail to meet monthly repayments, homeowners are at risk of losing their home;

- If income declines and cannot make monthly mortgage payments, risk of losing home;

- If property prices fall, there is a risk that the value of equity in the property is less than the value of the mortgage, leaving the home owner with risk of negative equity;

- Interest rates tend to be either variable or fixed over the relatively short term. There is a risk therefore that interest payments could increase;

- No independent legal advice required;

- Can borrow up to 100% of value of property;

- Early repayment charges (ERC's) are likely to be applicable only short term;

- Mortgage payments typically repay interest and capital.

Lifetime mortgages

- No monthly repayments are required. Interest rolls up and the capital + rolled up interest is repaid when the homeowner either dies or moves into long term care;

- Homeowner is not required to make monthly repayments, so no risk of losing their home;

- All SHIP compliant equity release plans have a no negative equity guarantee which means that there is never a risk of the value of the debt exceeding the value of the property.

- Most lifetime mortgages are fixed interest rate for life;

- SHIP compliant lifetime mortgages must be either fixed rate or have a cap fixed for life, so any increase is limited;

- Independent legal advice is required if purchasing from a SHIP provider

- Loan to value increases with age, but are typically a maximum of 50% of the value of the property;

- No monthly payments required, so rolled up interest and capital reduce amount of inheritance.