Part 3: Equity release: - What would an independent financial adviser recommend?
OVER the last two weeks we’ve talked about the pros and cons of equity release.
Choosing where you go for advice is one of the most important factors to consider.
The first port of call is an independent financial adviser (IFA). There are a range of options but none serve you like an IFA.
An IFA can look at every option available in the market but also another option: Do nothing, or do something that does not involve a commission-paying product.
An IFA will discuss the pros, cons and alternatives with you, but also whether other options are better.
You will be able to make an informed decision knowing they are not biased toward taking out an equity release plan, as the only means of getting paid.
Other types of adviser include those equity release advisers who are not independent financial advisers, but can offer you all equity release options in the market place.
Next are the advisers who offer a limited arrange of options, and finally there are advisers who just offer one equity release option.
Clearly, the IFA will start with. “Do you need to do this at all?”
That is essential in ensuring you are on the right rail tracks at the beginning.
For example: Personal loan rates are exceptionally low at the moment and not too dissimilar to an equity release.
Naturally, that has to be repaid each month, but seeing as many loans are taken out for home improvements, it seems a good starting point.
Downsizing to another property is an option, but there are of course costs of selling and buying to consider.
Consider taking out a retirement interest only mortgage. With that option, you have the Capital to spend, but pay the interest each month.
An option may also be to rent a room out in your home. Currently you can do so for £7,500 per year tax-free.
Finally, but not exhaustive, be sure to check what local authority grants exist for any home improvements you may be considering.
Now that you have decided equity release is the best way forward, your IFA has to choose the best option available to you.
Let’s compare the options available: The lowest rate available is 2.41 per cent. The highest is more than twice the price at a staggering 5.7 per cent.
Other key factors involve the make up of the plan. Some have a minimum age of 55 and others 60. The maximum age varies mainly between 85 to 95.
Loan amounts also differ. Most maximums are 50 per cent of the value of the property but others will lend a greater amount (up to 60 per cent if the mortgage is medically underwritten – crudely, they are basically checking your life expectancy).
The totals allowable vary from lender to lender, with one offering £100,000 and another up to approximately £3m.
The interest rate should always, always be fixed but at worst you should cap the mortgage if you go for a variable rate.
A cap allows your equity release mortgage to rise with interest rates but capping it at a certain level. With rates at historic lows and current fixed rate mortgages at 2.41 per cent, it’s hard to look beyond the guarantee of the fixed options available now.
Some equity release mortgage companies allow you to repay interest as you go. For example, you may receive an inheritance, or may have deferred your pension for its Inheritance tax breaks, and then took the tax free lump sum before your 75th birthday.
Now you might want to repay the capital or some of it. If this was a consideration, or option, your adviser would need to clarify this at the beginning to ensure that provider allowed this as an option.
That is just some of the many varying differences an IFA would look at before guiding you to the best solution.
Go in with your eyes wide open and take your time.
I know you might consider your family to be meddling but do discuss it with them.
It’s a difficult, but courageous conversation to have, and in the long run is the better way.
Peter McGahan is chief executive officer of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary conversation on equity release, call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.