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Hello and welcome to Financial Illumination, your one-stop shop of all things financial
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planning and personal finances. My name is Chris Fisher. I'm one of the financial planners
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here at Lunar Wealth and I'm out of the Penn office. I'm joined today by Sara Moore, who
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is one of our financial planners from the St. Albans office. We're here today, Sara,
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to talk about equity release and I think it's fair to say that at Lumin you are an equity
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release expert. So thanks very much for coming in. So Sara, talk to me about equity release.
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So can you just give us a very brief description to begin with about what equity release is?
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So equity release is essentially a way of releasing equity from your property but still
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being able to live there. Clients need to be over 55 years of age to be able to release
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some funds. The older you are generally the more you can release. There may be a whole
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host of reasons which we'll talk about as to why people are now exploring this and this
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is becoming a lot more common. Okay, so it sounds as though it's not a kind of one size
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fits all approach for everyone. So can you just give us a bit of context about who equity
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release would be suitable for? It would mainly be for people that are asset rich and cash
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poor, meaning a substantial amount of their wealth is tied up in their property. They
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don't want to move, they've thought about downsizing, it might not be suitable for them
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or they want to make adaptions to the property they're living in and actually by releasing
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a portion of that money they can remain in the property for the whole of their retirement.
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Okay, so it's about giving a bit more liquidity rather than having most of your money tied
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up in the property itself. Absolutely. I think it's really common at the moment for people
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to just casually say, oh yes, we'll just downsize. When the reality comes to it, they like where
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they live, they don't want to part with their property and to be able to stay there and
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have a way of staying there but having enough funds to ensure that they've got the income
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they need for the whole of their retirement, live comfortably, equity release can be one
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of the options that is explored more frequently. And so equity release itself, is it just one
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singular product or is there different types of equity release? Can you explain more about
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Yeah, there are two types. One that is not so frequently talked about or used now is
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a home reversion plan. And this is where you give up ownership of your property in exchange
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for a lump sum. You can then live in the property until you pass away. More frequently now used
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are the lifetime mortgages. So a traditional lifetime mortgage would essentially be like
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a traditional mortgage, but there is no repayments needing to be made. Clients can live in the
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property until death or entry into long term care. So you touched on there about not needing
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to repay the mortgage itself. But if people did want to obviously repay because I'm guessing
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there's an implication in terms of the amount borrowed for not making repayments, how can
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people go about that and what options are available to them? So more and more, this
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is becoming more frequently talked about and more products are now coming into the market
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to enable people to do this. Essentially, you set up a loan with the option to make
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repayments. Often that's up to 10% of the amount borrowed each year, which means clients
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can actually keep on top of the interest payments if they want to, but this is on a voluntary
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basis. So often what we might see is people might commit in the earlier years to making
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a regular repayment. That could be a monthly payment or a payment once a year. That will
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have the effect of slowing down the compounding effect of the interest. The longer the period
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that they make the payments for, the slower that roll up effect will be. But the good
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thing is the flexibility because at any point, if circumstances change or they decide actually
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now we'd like to stop making repayments, they can just stop.
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And in terms of your experience with advice on equity release, would you say it's more
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common for people to make repayments or elect not to or a combination of the two?
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Probably a combination of the two. I think more recently with the introduction of products
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that allow that flexibility, it's becoming more common that people might think about
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it. And I often find with conversations when I start talking to clients about this, they
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weren't aware that this is something that could be done. So they very much think it's
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either you've got an interest only mortgage where you are committing to making the payments
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or the lifetime mortgage where that interest roll up will happen. That will concern people
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sometimes, particularly at the moment we're seeing higher rates than we would have done
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a few years ago. So the effect of that, particularly for larger loans, could have an impact on
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that interest rate. The larger the loan to value can mean the interest rate that they're
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paying is going to be higher. So actually making some repayments in those earlier years
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really does have a big effect. And we can clearly illustrate that when we're talking
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and actually looking at different scenarios as to how it will look if somebody is making
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repayments versus somebody that doesn't and how fast that loan and the interest will roll
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up.
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Obviously, equity release itself, I think it's fair to say that hasn't always received
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the best press and it has been in the news previously and had negative connotations attached
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to it. So what are the risks that clients should be aware of when considering equity
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release products?
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I think the main thing with equity release is that clients are aware that that's not
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the only option. So all options should be explored alongside that. So, you know, do
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they have other savings and investments that they could utilise first? Would a retirement
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interest only mortgage suit somebody that might be in receipt of substantial pension
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income? So it's making sure that all of those options are explored before looking at equity
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release as the best option for people. And yes, you're right, there was a lot of bad
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press back in the day. These products were sort of coming out with much higher interest
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rates, people being locked into early repayment charges throughout the term of the loan, the
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whole term of the loan, which meant they could never repay without paying a penalty. A lot
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of that has changed now and lenders adhere to the code of the Equity Release Council.
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And amongst other things, one of the things that includes is the no negative equity guarantee.
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This is something that people found beneficiaries from estates were finding if somebody had
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passed away, suddenly they had a loan that was actually worth more than the property
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value. So there was a debt against the estate. That now can't happen. So you will never owe
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more than what your property is worth. Okay, so is it would it be fair to say that equity
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release now is a lot more safer and a lot more regulated than perhaps it used to be?
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Absolutely. Yeah, I think people have got to can have a lot more confidence in it now.
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One of the things that people might worry about with equity release is that they are
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sort of locked in, meaning that they can't move if their circumstances did change in
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the future. Actually, the equity release products will allow people to port the loan,
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meaning they can take it to the other new property with them. The only caveat to this
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is the new property they move to must actually comply with the lenders lending criteria.
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In the event that it doesn't, there are sort of certain circumstances where the loan can
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be repaid without any early repayments charges being applicable.
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So coming back to equity release self in the products, is there a limit in terms of
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how much someone can release in their property? Or could you realistically release the whole
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value of your property?
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No, so there are limits. And actually going back to that no negative equity guarantee
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is why now lenders will be more strict about how much they will release. And ultimately,
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it will depend on your age or the age of the youngest if there is a couple. So the younger
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you are, the smaller the percentage known as a loan to value is available to borrow.
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The reason for this is if somebody aged 55 was borrowing, let's say 50 or 60% of their
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property and that's rolling up over another 40 years potentially, that's where we've
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got the danger of the value of the loan exceeding what the value of the property is. So lenders
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will have different products with different loan to value maximums. Ultimately, then you
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can borrow up to the
maximum for your age.
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And obviously, something very topical nowadays and something that you and I talk a lot to
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clients about is inheritance tax planning. So can you just explain how and if equity
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release can be tied into inheritance tax plan and how that works?
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Yeah, and as you say, more and more discussions around inheritance tax planning and things
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are changing all the time, particularly with the inclusion of pensions from April 27. Now
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people are looking at how they can release some funds to make gifts to the children while
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they're alive rather than after they've passed away. And actually with a bit of proper planning
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in place, this means they could give the gift and allow plenty of time for the seven year
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rule for that gift to drop out of the estate altogether. This means they've released a
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portion from the property which the children would be inheriting anyway, but actually they're
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gifting it to them sooner, allowing that to potentially benefit from inheritance tax
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saving.
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Yeah, and I guess from what you just said, it's about being able to see the children
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or the beneficiaries enjoy it during their lifetime rather than receiving the property
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when the parents are no longer around or when the donor is no longer around. It's about
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being able to see enjoyment out of it really.
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Absolutely. And I think one of the key things now is getting harder and harder for those
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younger ones to be able to get onto the property ladder. And where the parents can then step
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in is releasing a portion of equity from their own property to gift to the children to allow
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them to get onto that property ladder. And like you say, to allow them to see them enjoying
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the benefit of that gift is really fulfilling for people.
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And obviously we've talked about the negative connotations attached to equity release and
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I think it's quite clear that equity release isn't always the most clickable option to
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people. Can you just talk us through what alternatives there are out there and when
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would you then consider equity release as an option?
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So I think the important thing is for people to look at everything they have
in their position.
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Do they have other savings, investments or pensions that they could draw upon if it
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was purely some income supplementation that they're looking for? With equity release,
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one of the important things is for people not to think that they can release a sum of
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money and have it in the bank and then draw from it when they want to because in reality
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that interest is rolling up. So what we'd encourage people to do is explore whether
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they've got any other savings investments they could call upon first of all. Obviously
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to have the downsides in conversation because sometimes actually people might, that might
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be right for some people but not for others. Or even if there's other family members involved.
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You know often it could be I'm talking to people about equity release who still have
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parents that are alive and you know there might be some sort of other family members
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that can give help. The other thing with equity release is to be really mindful of is what
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people are looking for in terms of releasing this sum of money because if people are looking
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to supplement income and not in requirement of a large lump sum for a specific purpose,
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for example to repay a mortgage, then draw down option is actually more frequently used
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now. Draw down would be where you would release the initial sum of money that you need but
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you would actually ring-fenced a further portion of money that you don't pay interest on until
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you draw it down. This means people can release what they need now, do with it what they need,
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they can then go back and draw down on regular occasions later on and then that way they're
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only paying interest on the amount of money they've actually released.
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Okay so you don't have to release the whole amount in one go, you can start with a portion
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and then revisit it and release more and more as you go along.
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And also that makes it a much more simple process to actually access the draw down part
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because the one thing with equity release is you know it is entering into a mortgage
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agreement with the lender so there will be a lot of legal steps to go through so you
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know it can take maybe 8 to 12 weeks to arrange everything. With draw down you've already
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done all that so then you know it could be the following year and somebody says actually
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I'd like to release another portion it's a much more straightforward and speedy process
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for them.
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So you and I know more than anyone that things are constantly changing in the financial space
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and in the financial world and you know change to legislation, changes to products, so how's
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that also impacted equity release and how are things evolving in that space as well?
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I think the main thing is it's becoming more and more of a flexible product. As I've said
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previously with regards to people who are thinking that actually you take out an equity
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release the interest rolls up and you know you can't do anything to slow that down. The
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reality now is you've got those options built in so actually allowing people to not commit
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necessarily to making payments and through to the end of the term but actually just to
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decide what suits them best. So more flexible products are coming out into the market, this
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will allow people to actually decide how much they want to pay and how long they want to
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pay it for. So somebody could come into this product and say okay I'm comfortable making
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X amount of payments over so many years and then I'd like to stop but actually if they
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needed to stop sooner then they can, they're not going to be penalised. Also when it comes
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to early repayment, I've talked about early repayment charges and how these can fit in
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as well. So you may have a client that has no intention of ever paying that loan off
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and they're quite happy with that and other clients may say well actually I just need
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this for 10 years. There may be an element of an early repayment charge coming in there
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but what we've found is actually the products, the early repayment periods are becoming shorter.
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So they've even introduced products now where there's a nil early repayment period and an
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early repayment charge, just to explain what that is, that is where somebody is repaying
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early a bit like when you fixed your mortgage rate for two years, the lender is expecting
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to receive that amount of interest on
that money that you've borrowed. The same with
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equity release and it may be that you've got a product with a 10 year early repayment charge
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and then this will gradually reduce down. So let's say on year one it might be 9% of
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what you've borrowed, it will be quite high, then each year it will gradually reduce down
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say 8% in year two, 7% in year three and so on. But depending on the client's circumstances
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there are products out there with much shorter early repayment charges, they often come with
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a higher interest rate so there'd only be specific circumstances where that would be
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the right product to use. So this is where it's really clear the importance of people
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getting the right advice, making sure that if equity release is right for them that actually
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then what type of loan are we looking at for them, what sort of options and flexibility
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do they need so that then they're not going to be having difficulties in a few years in
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if their circumstances did change.
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One thing we've already talked about is obviously the risks involved in equity release and things
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that people should be considered before taking out an equity release product. But what would
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you say is one common misconception about equity release?
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I think the main misconception is the bad name that it had from many years ago. So in
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the past this is where equity release did have quite a bad press for many years, there
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wasn't the flexibility in there, there also wasn't the regulation that there is now to
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ensure that people don't borrow too much if they're too young, leading them into that
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negative equity position that we talked about earlier. So people just need to be very aware
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of what they're doing and why they're doing it. Another important thing is involving the
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family in the conversations. I encourage clients to bring family into the meetings to make
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sure everybody is aware of what they're doing. And often it's the case that they are doing
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this to help the children anyway, so it's not a question of that the children are going
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to potentially inherit less, they're going to inherit sooner, may mean then that what
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they might inherit at the end may be less, but actually they've had the money when they
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need it. So I think the main thing is involving the families is really important and also
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getting the right advice, making sure that the product is right for them, like we talked
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about with the early repayment charges, again that can be worse, that could trip somebody
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up.
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And you mentioned there about involving family within the process if they were to take the
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steps into taking out an equity release product. So what else should someone do if they are
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considering taking out equity release and what are the steps involved?
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So I think the main thing is really important to be getting advice, exploring all options
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first of all and if then we are arriving at equity release being the most appropriate
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option then really sitting down and thinking about how is that going to work for them,
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do they want to make payments. Cash flow planning really does come into this as well because
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to see where people are going to be sat in future years, making sure that the type of
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loan that they are going to take out meets their requirements. They are not borrowing
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too much or making sure they have borrowed enough.
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Thanks for that Sarah and thanks very much for coming in today and explaining all things
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equity release. As always with our episodes please be aware that everything that we have
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discussed does not constitute as financial advice and that the content that we release
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is for educational and informational purposes. If you did want to get in touch to discuss
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equity release or any of the other topics that we do talk about then please do get in
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touch via our website at loomandwealth.co.uk