July 2008

What clients need to know

While appreciating that most Retirement Planner readers are advisers, many are not active in equity release. You may be reading this as a potential introducer to an equity release specialist. If so, this first section may be helpful.

- Make sure your adviser is independent, i.e. whole of market, and that they can advise on both lifetime mortgages and home reversions.

- Think about how much you want. It is surprising how many clients take a finger in the air approach and ask for a round figure without having thought it through. When we sit down and discuss what they need and why, this amount often comes down.

Taking the right amount saves money in the long run and leaves more for later on or as an inheritance - with a drawdown scheme, you can always come back for more when you need it.

- Include family - this is of course optional but to be encouraged.

Client awareness

Each adviser will have their own take on this, but my own experience is mixed.

Clients referred to us by IFAs and enquiries received online from 'silver surfers' often have a fairly good grasp of the main points.

Enquirers from other types of advertising can have a much lower level of understanding, leading me onto ...

Exploding myths

I wonder if there is an area of financial services plagued with more misconceptions and disproportionate bad publicity than equity release.

"I might lose the house" - with a regulated equity release plan from a SHIP member, the client cannot lose their home.

This is occasionally raised as a concern from less knowledgeable clients, especially when they hear the word mortgage.

"If I do equity release, there goes the house" - while this is potentially true there are so many shades of grey it has to be dismissed as a myth.

Obviously the more a client releases the less of the house will be left. The most popular type of plan I see is a lifetime mortgage with a drawdown facility. With people often taking under £50,000 on properties valued at £300,000 or more, it is hard to see nothing being left when the client dies.

"Don't do equity release, downsize instead" - a sweeping statement that, on its own, is nonsense. It is also perhaps crossing the line of making lifestyle choices for the client which, in my opinion, we should avoid. If they want to move to a smaller property, that is of course fine. The choice has to be the client's alone and should have more to do with personal and lifestyle reasons than financial advice.

For many clients in a three bed semi, the downsizing option means a flat which they may not want to do. If they are in a flat, what scope is there for downsizing at all?

Add this to the sheer stress and hassle of a house move on an older client, moving away from friends and amenities and downsizing looks less and less appealing. This is before we consider the financial arguments which would need another article to address.

"It's expensive" - accepting that most equity release plans are lifetime mortgages, the interest rate is fixed for life at rates currently ranging from 6.12%. Compare this with standard variable mortgage rates and I don't think that is expensive.

When the untrained eye sees a debt that doubles every eleven years or so, the initial response can be an emotional one but take yourself back to your school days, that's the effect of compound interest. If you borrow money, you have to pay interest. Either you pay that on a monthly basis, and interest only mortgages are an alternative to equity release, or it rolls up.

Establishing suitability

As financial advisers we have to establish some basics to see if equity release is suitable for our clients.

All of the following should be part and parcel of initial discussions and certainly be included in a fact find.

- Age - the minimum age for a lifetime mortgage is 55 and usually 65 for a home reversion.

- How much is required? - an adviser should always check that the client's expectations are realistic. Sometimes I have to tell clients that equity release is not currently possible because the amount required to clear an existing mortgage exceeds what can be provided with equity release.

- Property type - as with conventional mortgages, this is something to watch out for as the equity release market is much smaller and providers can be more choosy.

- Establishing ownership - this is important from three main angles.

1. Sometimes a married couple have bought a property in one name only. As equity release comes to an end with death or long term care, we don't want to see the non-owning spouse without a home, so a transfer of equity into joint names is advisable.

2. Trusts - if a married couple split the tenancy and the ownership is now half the widow(er) and half the late spouse's trust, equity release is probably not possible. They will need to consider breaking the trust and, of course, legal advice should be sought.

3. Children - if the clients have signed over some of the house to their children, as some people have done with an eye on inheritance tax or long term care costs, equity release will not be possible. The property needs to be owner occupied with the qualifying ages applying.

- Grown up children living at home - it is important to establish the situation and expectations of all parties. If the clients want to leave the house for their child to continue to live in after their deaths, equity release is only likely to be suitable if the child is able to take their own mortgage to repay the equity release in the future.

If the child is expecting to move out in due course anyway, this may not be an issue.

The child would usually be required to sign a waiver and advised to seek their own independent legal advice.

This is just the groundwork before we can discuss lifetime mortgage v home reversion, the impact on state benefits, early repayment charges, portability to sheltered housing and the options for guaranteeing an inheritance.

In summary

Equity release can be life changing for clients and rewarding for the adviser. I have had more spontaneous thanks from equity release clients than I ever did as a general practitioner IFA.

The misconceptions can be overcome by education. Hopefully this will improve with better media coverage over time but for now it is down to the individual adviser to talk these issues through with their clients.

For the adviser factsheet '10 Steps to Success in Equity Release' email david@sixtyplusonline.co.uk

David Wright
Managing Director
Sixty Plus