Part 1: Is equity release ever a good idea?
TAKING a break from watching Anthony Bourdain on my Netflix documentaries during rainy Sunday lockdown, my television turned on to a mainstream television to be hit with an advert selling equity release.
Selling it like it was a bar of chocolate. It isn’t.
Realising I am out of touch with adverts (I’ll watch mainstream TV for less than an hour a year) I struggled with its ‘sure it’ll be grand’ attitude to getting into more debt.
Equity release is a great idea for some, but not for all. I will dedicate a bit of time to understanding equity release and its risks and benefits over the next two weeks so you can make a safe, secure decision you are in control of.
An ex-regulator from the Financial Conduct Authority works with me on our board, and I asked him what the regulator looks at to protect customers.
Do customers fully understand the risks and are they well documented and explained? Have vulnerable customers been identified? Vulnerable does not just relate to mental health. I might argue that anyone who does not grasp the risks and can explain them back to me is vulnerable to making the incorrect decision.
It's an important matter.
It is easy to borrow and spend £1,000, but try repaying it. So responsible marketing, communication and borrowing is essential. The older we become, the more vulnerable we can become.
Who is equity release good for?
You may have come to the end of your mortgage term but can’t repay the mortgage, so fixing a mortgage on an equity release secures your tenure in your property, and allows you to repay your mortgage to the bank. Now, interest can roll up on the mortgage, which is repaid on death.
Having a no-negative equity guarantee on the mortgage ensures you can never owe more than the value of your home, even if prices fall.
Many equity release plans are taken out to do home improvements. For example, to reduce bills and create sustainable heat, the home-owner releases equity and then creates sustainable green energy with solar, insulation, air to water heating for example.
This lowers bills, creating more spending power, a warm home, and of course gives the customary ‘see ya later’ to the big greedy energy boys.
On top of this, we can see that based on average property prices, moving to an energy performance certificate of C or above increases the value of the home by as much as 10-14 per cent. The loan rolls up, there is uplift in value, and bills have fallen, whilst you are still warm.
Boosting disposable income to enjoy the great years of life, for holidays and for large purchases such as camper vans or extensions are very common. The nomadic traveller who borrows, ‘does their home up’, buys a camper and travels for a part of the year whilst letting their home out is quids in.
Another key area is that of inheritance tax planning and gifts.
Undoubtedly, with my three girls, I want to see their wee faces when they get a hold of my money. That is understandable, and borrowing now to gift them a future whilst seeing the glee, is better than not being there when they say: “Is that all?”
Inheritance tax planning is also very common in relation to equity release planning. When you borrow and gift to children/grandchildren, the gift is outside of the estate after seven years. The debt however, rolls up with interest, which in turn reduces your taxable estate.
Sometimes a trust is created with the Capital which produces an ‘income’ back to you to enjoy, but the Capital you place into that trust has exited your estate along with any growth on that Capital.
On death, the capital passes in trust to the beneficiaries free of inheritance tax. Meanwhile, once again, the debt increases inside the estate and reduces the tax payable.
These are just some of the benefits. Whether you proceed or not should be based upon a full understanding of risks and rewards, some of which I’ll cover over the next two weeks.
:: Peter McGahan is chief executive officer of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have question on sustainable investing, call Darren McKeever on 028 6863 2692 or email email@example.com or visit https://www.wwfp.net/