Thinking About Equity Release

Over the past 20 years, there has been a sea change in the equity release market and mostly for the good of clients over the age of 55.

Mark Taylor, Senior Associate in the Blanchards Bailey Residential Property team, summarises the changes in the equity release market and the key considerations for clients thinking of entering these arrangements who want clarity, clear and independent advice and confidence in what they are embarking on.

Until the Financial Conduct Authority (FCA) brought it under tighter regulation in the mid-noughties “Equity Release” was historically problematic for elderly clients.  We would always recommend independent local financial advisers and Blanchards Bailey Financial Services also provide fantastic support to people considering equity release.

Prior to the FCA intervention, equity release was often arranged via lifetime mortgages with interest provisions that potentially ate into the equity that might have been left for beneficiaries. “Home reversions” also took place whereby clients could sell their property or a share of it but have the right to remain in occupation under a lease for life.

A lack of regulation on commission and arrangement fees sometimes saw clients receiving only a small percentage of their property’s true value by way of a tax-free lump sum.  In some cases a client might realise 40% of the true value of their property and live in that same property rent-free only to pass away after a few years. The old scheme was seen by some at the time to something of a gamble where clients might receive very little benefit during their lifetime in comparison with the gains made by lenders and investors in home reversions. The unfortunate reality of course was that Clients were entering equity release schemes because they had a real financial need in later life and those needs come in many shapes and sizes from helping children get on the property ladder to embarking on a world cruise!

In the mid-noughties, the FCA began to heavily regulate investors who entered home reversions as a business or to own multiple properties in a portfolio. This resulted in these home reversion arrangements being largely abolished and there have been very few after 2005, although a morphed version still exists.

In contrast, the modern lifetime mortgage market has boomed and is now the most popular form of equity release. Lifetime mortgages now give a cash release at a time of most need, with no repayments or voluntary interest repayments and without parting with ownership of one’s home and a clear illustration of what needs to be repaid well into the future is set out in the terms of the offer. 

In short, over the past 15 years or so equity release has been transformed. The process is far more transparent, allowing clients to be fully advised on both the financial implications during their lifetimes and following their deaths. The legal process has been partly aligned with a re-mortgage but with additional safeguards in place.

Lending is regulated by the Equity Release Council to ensure that property owners know exactly what they are getting into and the lending terms are far easier to understand.  Interest rates are more aligned with regular high street mortgages and lenders are obliged to set out clearly the amounts that will need to be repaid. This means that clients are likely to have something to leave to their beneficiaries when they (or the survivor if the property is jointly owned) pass away.

One of the most important developments in equity release transactions is that unlike a high street mortgage, both lender and borrower must be separately legally represented, and only qualified Independent Financial Advisors can sell these products. Additionally, an emphasis on the client’s security of tenure (the “right to live in the property”) for the rest of their lives wholly underpins the whole ethos of the lending – these are genuine “lifetime” mortgages that have been developed to be trustworthy and fair.

Even now, with all the safeguards that have been put in place, entering into an equity release arrangement is still a big move particularly in later life.

Our residential property team has seen a considerable uplift in the number of new instructions on equity release matters in recent years and are ideally placed to advise clients from the initial key considerations, through to completion of the transaction.

When entering into equity release, it is important to consider the value of the property. In the South-West, property prices have traditionally risen well ahead of the national average.  Consequently, the interest that accrues on a lifetime mortgage is less likely to outstrip the rise in the value of the property because of the interest rates generally keeping pace with property values.

It is important to remember therefore that equity release does have an impact on the beneficiaries of one’s estate and it is important to consider the legal implications of entering into equity release in the form of a lifetime mortgage and the reduction in the size of the estate after the repayment of the mortgage.

We will not malign the large established equity release companies who advertise in the national press and media but we do advocate the local advisers who are well qualified, generally cheaper in terms of fees and have the same access to multiple lifetime mortgage providers.

You should also consider whether a will or lasting power of attorney should be put in place at the same time. These arrangements should be carried out a solicitors firm rather than via “online” services or will-writers who are not qualified nor regulated in the same way as solicitors.

If you are considering equity release, please contact a member of the Blanchards Bailey Residential Property team to discuss without commitment.  We’re here to help for life’s journey.

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