Part 2: How safe is equity release?
FOLLOWING last week’s column on when equity release can be used, here are a few pointers for you to avoid any pitfalls.
The Money Advice Service suggests that you always use an independent financial adviser (IFA) and check they are on the FCA register. That is your starting point.
If you use a company that just offers equity release, they will not be able to advise you on the options available: accessing your pension in the best manner, the impact on inheritance tax of your equity release, and any other trusts or plans that may be affected, and of course the impact on your cash flow and potential benefits.
The starting point must always be: Is this a good idea at all? Is there a better way? Do I really need to do it? equity release suits less people than actually want to do it. Trust me.
If you approach someone who is paid only if you proceed with an equity release, you might consider if the advice will be impartial.
For example, through this column we assisted a complaint to redress a client’s equity release who had been advised to just take out the release (handsome commission to the salesman), and put the money in her bank.
She didn’t use the money and said she just wanted to access it rather than it ‘sit in her house’!
And so she had cash in her bank account, paying tax as it grew which was at an interest rate over 4 per cent higher per year than the rate she had in her bank account.
If held for 10 years, that was nearly half the debt accumulating again.
She was better to simply go look for the money when needed, but the salesman in this instance wanted that ‘sale’ to be with him, rather than someone else in a few years time.
An IFA will also offer the whole of the market to assess the best plans with the least pitfalls. For example, last year the difference between the best rate and the worst rate was a staggering 4.1 per cent per year, compounded to 49.5 per cent over 10 years.
An IFA will look at the component parts of equity release, and after consulting you, will recommend the solution that fits and also the best available rate.
One of the most advertised companies in this market place are not whole of market and operate from a panel that is limited.
Furthermore they only deal with lifetime mortgages and do not deal with home reversion schemes. Therefore, that’s all they can offer.
An IFA will offer every option, including, do nothing at all, or access the money elsewhere.
Other pitfalls: The cost of an equity release could be higher than a normal mortgage so that debt may grow quicker than a normal mortgage. They normally are, and whilst that is to factor in some risks to them, you should be aware that a normal mortgage might be better in the short term.
The two types of equity release are the home reversion and lifetime mortgage.
The home reversion option will rarely give you anywhere near the true market value of the property.
If you took an equity release scheme, certain state benefits could be impacted which could well be counterproductive.
If you decide to move later, or change your mind and repay the equity release loan, this can be complicated and you may have large early repayment fees. These aren’t applicable if you die or go into care, but can be cumbersome outside of that.
The Equity Release Council states clearly you should have a ‘no negative equity guarantee’ (owe more than the house is worth). An IFA will make sure of that.
Be sure you can move to another home, that you can always live in it, and that the interest rate is fixed or capped.
It may be that its better you apply to take sums out, as you need them. This is preferable as you avoid paying interest during that time.
:: 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/