DO you remember Dudley Moore and his sketch on honesty advertising in the movie ‘Crazy People’? He is asked what marketing is while he’s with his nurse girlfriend in a psychiatric hospital. When he explains, they respond: ‘So you lie for a living’. It led to the line: ‘Volvos, they’re boxy but they’re good’. That’s all we need to know. ‘Get to the point and tell me why it’s helpful, or can hurt me’, is a more honest marketing strategy.
When I see financial products being marketed I think I could have had a great afternoon with Dudley Moore creating financial adverts: “People lose money on these funds, but they lose less with ours.” You might need to watch the movie.
The Advertising Standards Agency (ASA) recently censured an advert on equity release from Key Retirement Solutions claiming it used ‘fear’ about the potential of high mortgage rates hurting people’s finances, and that an equity release plan was comparable to a normal mortgage. They aren’t.
I’ve covered the benefits and pitfalls of equity release in recent articles along with how to use an independent financial adviser to put one into practise, so I’ll not cover that here.
Re-mortgaging, because of high interest rates and replacing it with equity release as a solution, is contentious and that needs careful independent financial advice.
Firstly, will mortgage rates remain high? That’s the above driver to replace a mortgage with an equity release – no, I don’t believe they will. We’ve prepared a detailed guide on that, so message me for a copy.
You then have to consider the pitfalls of an equity release. Those customers used to rates of around 0.5 per cent for many years, became acclimatised to that. They are now struggling to pay the interest at nearly six per cent, so they consider an equity release so that they don’t actually have to make monthly payments, instead allowing the debt to roll up against their home. An actual example: a customer has a mortgage for £94,990 which, at one per cent, would be £79 per month. At today’s rate of 5.49 per cent, that is now £435 per month, and that’s just the interest.
Looking around on the internet, I can see others making this same comparison/promotion, which of course may look attractive if you feel rates will continue to rise, but not if you don’t. Please note, it’s rare for financial advisers to have in-house economists or those capable of calculating where rates may move so don’t expect that off them.
Now, just consider what rate you will move to. A typical mortgage rate today is around 5.49 per cent as above, but the better equity release mortgage rates start at nearly 1.8 per cent more at 7.27 per cent.
Is it better to wait and see if mortgage rates drop further before panicking into an equity release and being locked into a high rate as above? I think so. If your finances find you pushed into equity release, then take independent advice, not advice from someone who makes their money selling you that one product and also from a restricted amount of providers. If all they have is a hammer, everything looks like a nail.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For advice on equity release or our detailed interest rate guide, call Pat Greene on 028 6863 2692 or email firstname.lastname@example.org.