UTSKRIFT 🔗
1
00:00:00,000 --> 00:00:11,000
Hello and welcome to Financial Illumination, your one-stop shop of all things financial
2
00:00:11,000 --> 00:00:16,000
planning and personal finances. My name is Chris Fisher. I'm one of the financial planners
3
00:00:16,000 --> 00:00:22,000
here at Lunar Wealth and I'm out of the Penn office. I'm joined today by Sara Moore, who
4
00:00:22,000 --> 00:00:27,000
is one of our financial planners from the St. Albans office. We're here today, Sara,
5
00:00:27,000 --> 00:00:33,000
to talk about equity release and I think it's fair to say that at Lumin you are an equity
6
00:00:33,000 --> 00:00:39,000
release expert. So thanks very much for coming in. So Sara, talk to me about equity release.
7
00:00:39,000 --> 00:00:45,000
So can you just give us a very brief description to begin with about what equity release is?
8
00:00:45,000 --> 00:00:50,000
So equity release is essentially a way of releasing equity from your property but still
9
00:00:50,000 --> 00:00:55,000
being able to live there. Clients need to be over 55 years of age to be able to release
10
00:00:55,000 --> 00:00:59,000
some funds. The older you are generally the more you can release. There may be a whole
11
00:00:59,000 --> 00:01:03,000
host of reasons which we'll talk about as to why people are now exploring this and this
12
00:01:03,000 --> 00:01:08,000
is becoming a lot more common. Okay, so it sounds as though it's not a kind of one size
13
00:01:08,000 --> 00:01:12,000
fits all approach for everyone. So can you just give us a bit of context about who equity
14
00:01:12,000 --> 00:01:17,000
release would be suitable for? It would mainly be for people that are asset rich and cash
15
00:01:17,000 --> 00:01:22,000
poor, meaning a substantial amount of their wealth is tied up in their property. They
16
00:01:22,000 --> 00:01:26,000
don't want to move, they've thought about downsizing, it might not be suitable for them
17
00:01:26,000 --> 00:01:30,000
or they want to make adaptions to the property they're living in and actually by releasing
18
00:01:30,000 --> 00:01:35,000
a portion of that money they can remain in the property for the whole of their retirement.
19
00:01:35,000 --> 00:01:40,000
Okay, so it's about giving a bit more liquidity rather than having most of your money tied
20
00:01:40,000 --> 00:01:45,000
up in the property itself. Absolutely. I think it's really common at the moment for people
21
00:01:45,000 --> 00:01:50,000
to just casually say, oh yes, we'll just downsize. When the reality comes to it, they like where
22
00:01:50,000 --> 00:01:55,000
they live, they don't want to part with their property and to be able to stay there and
23
00:01:55,000 --> 00:01:59,000
have a way of staying there but having enough funds to ensure that they've got the income
24
00:01:59,000 --> 00:02:04,000
they need for the whole of their retirement, live comfortably, equity release can be one
25
00:02:04,000 --> 00:02:12,000
of the options that is explored more frequently. And so equity release itself, is it just one
26
00:02:12,000 --> 00:02:16,000
singular product or is there different types of equity release? Can you explain more about
27
00:02:16,000 --> 00:02:21,000
Yeah, there are two types. One that is not so frequently talked about or used now is
28
00:02:21,000 --> 00:02:26,000
a home reversion plan. And this is where you give up ownership of your property in exchange
29
00:02:26,000 --> 00:02:33,000
for a lump sum. You can then live in the property until you pass away. More frequently now used
30
00:02:33,000 --> 00:02:40,000
are the lifetime mortgages. So a traditional lifetime mortgage would essentially be like
31
00:02:40,000 --> 00:02:45,000
a traditional mortgage, but there is no repayments needing to be made. Clients can live in the
32
00:02:45,000 --> 00:02:52,000
property until death or entry into long term care. So you touched on there about not needing
33
00:02:52,000 --> 00:02:58,000
to repay the mortgage itself. But if people did want to obviously repay because I'm guessing
34
00:02:58,000 --> 00:03:04,000
there's an implication in terms of the amount borrowed for not making repayments, how can
35
00:03:04,000 --> 00:03:09,000
people go about that and what options are available to them? So more and more, this
36
00:03:09,000 --> 00:03:13,000
is becoming more frequently talked about and more products are now coming into the market
37
00:03:13,000 --> 00:03:19,000
to enable people to do this. Essentially, you set up a loan with the option to make
38
00:03:19,000 --> 00:03:23,000
repayments. Often that's up to 10% of the amount borrowed each year, which means clients
39
00:03:23,000 --> 00:03:27,000
can actually keep on top of the interest payments if they want to, but this is on a voluntary
40
00:03:27,000 --> 00:03:32,000
basis. So often what we might see is people might commit in the earlier years to making
41
00:03:32,000 --> 00:03:37,000
a regular repayment. That could be a monthly payment or a payment once a year. That will
42
00:03:37,000 --> 00:03:43,000
have the effect of slowing down the compounding effect of the interest. The longer the period
43
00:03:43,000 --> 00:03:48,000
that they make the payments for, the slower that roll up effect will be. But the good
44
00:03:48,000 --> 00:03:54,000
thing is the flexibility because at any point, if circumstances change or they decide actually
45
00:03:54,000 --> 00:03:57,000
now we'd like to stop making repayments, they can just stop.
46
00:03:57,000 --> 00:04:02,000
And in terms of your experience with advice on equity release, would you say it's more
47
00:04:02,000 --> 00:04:07,000
common for people to make repayments or elect not to or a combination of the two?
48
00:04:07,000 --> 00:04:11,000
Probably a combination of the two. I think more recently with the introduction of products
49
00:04:11,000 --> 00:04:16,000
that allow that flexibility, it's becoming more common that people might think about
50
00:04:16,000 -->
Load full transcript
00:04:20,000
it. And I often find with conversations when I start talking to clients about this, they
51
00:04:20,000 --> 00:04:23,000
weren't aware that this is something that could be done. So they very much think it's
52
00:04:23,000 --> 00:04:27,000
either you've got an interest only mortgage where you are committing to making the payments
53
00:04:27,000 --> 00:04:32,000
or the lifetime mortgage where that interest roll up will happen. That will concern people
54
00:04:32,000 --> 00:04:35,000
sometimes, particularly at the moment we're seeing higher rates than we would have done
55
00:04:35,000 --> 00:04:41,000
a few years ago. So the effect of that, particularly for larger loans, could have an impact on
56
00:04:41,000 --> 00:04:45,000
that interest rate. The larger the loan to value can mean the interest rate that they're
57
00:04:45,000 --> 00:04:50,000
paying is going to be higher. So actually making some repayments in those earlier years
58
00:04:50,000 --> 00:04:54,000
really does have a big effect. And we can clearly illustrate that when we're talking
59
00:04:54,000 --> 00:04:59,000
and actually looking at different scenarios as to how it will look if somebody is making
60
00:04:59,000 --> 00:05:03,000
repayments versus somebody that doesn't and how fast that loan and the interest will roll
61
00:05:03,000 --> 00:05:05,000
up.
62
00:05:05,000 --> 00:05:09,000
Obviously, equity release itself, I think it's fair to say that hasn't always received
63
00:05:09,000 --> 00:05:17,000
the best press and it has been in the news previously and had negative connotations attached
64
00:05:17,000 --> 00:05:24,000
to it. So what are the risks that clients should be aware of when considering equity
65
00:05:24,000 --> 00:05:25,000
release products?
66
00:05:25,000 --> 00:05:29,000
I think the main thing with equity release is that clients are aware that that's not
67
00:05:29,000 --> 00:05:34,000
the only option. So all options should be explored alongside that. So, you know, do
68
00:05:34,000 --> 00:05:38,000
they have other savings and investments that they could utilise first? Would a retirement
69
00:05:38,000 --> 00:05:42,000
interest only mortgage suit somebody that might be in receipt of substantial pension
70
00:05:42,000 --> 00:05:48,000
income? So it's making sure that all of those options are explored before looking at equity
71
00:05:48,000 --> 00:05:54,000
release as the best option for people. And yes, you're right, there was a lot of bad
72
00:05:54,000 --> 00:05:59,000
press back in the day. These products were sort of coming out with much higher interest
73
00:05:59,000 --> 00:06:04,000
rates, people being locked into early repayment charges throughout the term of the loan, the
74
00:06:04,000 --> 00:06:08,000
whole term of the loan, which meant they could never repay without paying a penalty. A lot
75
00:06:08,000 --> 00:06:14,000
of that has changed now and lenders adhere to the code of the Equity Release Council.
76
00:06:14,000 --> 00:06:20,000
And amongst other things, one of the things that includes is the no negative equity guarantee.
77
00:06:20,000 --> 00:06:23,000
This is something that people found beneficiaries from estates were finding if somebody had
78
00:06:23,000 --> 00:06:28,000
passed away, suddenly they had a loan that was actually worth more than the property
79
00:06:28,000 --> 00:06:33,000
value. So there was a debt against the estate. That now can't happen. So you will never owe
80
00:06:33,000 --> 00:06:37,000
more than what your property is worth. Okay, so is it would it be fair to say that equity
81
00:06:37,000 --> 00:06:43,000
release now is a lot more safer and a lot more regulated than perhaps it used to be?
82
00:06:43,000 --> 00:06:47,000
Absolutely. Yeah, I think people have got to can have a lot more confidence in it now.
83
00:06:47,000 --> 00:06:50,000
One of the things that people might worry about with equity release is that they are
84
00:06:50,000 --> 00:06:53,000
sort of locked in, meaning that they can't move if their circumstances did change in
85
00:06:53,000 --> 00:06:59,000
the future. Actually, the equity release products will allow people to port the loan,
86
00:06:59,000 --> 00:07:03,000
meaning they can take it to the other new property with them. The only caveat to this
87
00:07:03,000 --> 00:07:10,000
is the new property they move to must actually comply with the lenders lending criteria.
88
00:07:10,000 --> 00:07:15,000
In the event that it doesn't, there are sort of certain circumstances where the loan can
89
00:07:15,000 --> 00:07:19,000
be repaid without any early repayments charges being applicable.
90
00:07:19,000 --> 00:07:24,000
So coming back to equity release self in the products, is there a limit in terms of
91
00:07:24,000 --> 00:07:29,000
how much someone can release in their property? Or could you realistically release the whole
92
00:07:29,000 --> 00:07:30,000
value of your property?
93
00:07:30,000 --> 00:07:36,000
No, so there are limits. And actually going back to that no negative equity guarantee
94
00:07:36,000 --> 00:07:41,000
is why now lenders will be more strict about how much they will release. And ultimately,
95
00:07:41,000 --> 00:07:46,000
it will depend on your age or the age of the youngest if there is a couple. So the younger
96
00:07:46,000 --> 00:07:51,000
you are, the smaller the percentage known as a loan to value is available to borrow.
97
00:07:51,000 --> 00:07:56,000
The reason for this is if somebody aged 55 was borrowing, let's say 50 or 60% of their
98
00:07:56,000 --> 00:08:01,000
property and that's rolling up over another 40 years potentially, that's where we've
99
00:08:01,000 --> 00:08:06,000
got the danger of the value of the loan exceeding what the value of the property is. So lenders
100
00:08:06,000 --> 00:08:11,000
will have different products with different loan to value maximums. Ultimately, then you
101
00:08:11,000 --> 00:08:14,000
can borrow up to the
maximum for your age.
102
00:08:14,000 --> 00:08:21,000
And obviously, something very topical nowadays and something that you and I talk a lot to
103
00:08:21,000 --> 00:08:27,000
clients about is inheritance tax planning. So can you just explain how and if equity
104
00:08:27,000 --> 00:08:31,000
release can be tied into inheritance tax plan and how that works?
105
00:08:31,000 --> 00:08:36,000
Yeah, and as you say, more and more discussions around inheritance tax planning and things
106
00:08:36,000 --> 00:08:41,000
are changing all the time, particularly with the inclusion of pensions from April 27. Now
107
00:08:41,000 --> 00:08:47,000
people are looking at how they can release some funds to make gifts to the children while
108
00:08:47,000 --> 00:08:53,000
they're alive rather than after they've passed away. And actually with a bit of proper planning
109
00:08:53,000 --> 00:08:57,000
in place, this means they could give the gift and allow plenty of time for the seven year
110
00:08:57,000 --> 00:09:02,000
rule for that gift to drop out of the estate altogether. This means they've released a
111
00:09:02,000 --> 00:09:07,000
portion from the property which the children would be inheriting anyway, but actually they're
112
00:09:07,000 --> 00:09:13,000
gifting it to them sooner, allowing that to potentially benefit from inheritance tax
113
00:09:13,000 --> 00:09:14,000
saving.
114
00:09:14,000 --> 00:09:19,000
Yeah, and I guess from what you just said, it's about being able to see the children
115
00:09:19,000 --> 00:09:24,000
or the beneficiaries enjoy it during their lifetime rather than receiving the property
116
00:09:24,000 --> 00:09:27,000
when the parents are no longer around or when the donor is no longer around. It's about
117
00:09:27,000 --> 00:09:31,000
being able to see enjoyment out of it really.
118
00:09:31,000 --> 00:09:35,000
Absolutely. And I think one of the key things now is getting harder and harder for those
119
00:09:35,000 --> 00:09:39,000
younger ones to be able to get onto the property ladder. And where the parents can then step
120
00:09:39,000 --> 00:09:44,000
in is releasing a portion of equity from their own property to gift to the children to allow
121
00:09:44,000 --> 00:09:49,000
them to get onto that property ladder. And like you say, to allow them to see them enjoying
122
00:09:49,000 --> 00:09:54,000
the benefit of that gift is really fulfilling for people.
123
00:09:54,000 --> 00:10:00,000
And obviously we've talked about the negative connotations attached to equity release and
124
00:10:00,000 --> 00:10:06,000
I think it's quite clear that equity release isn't always the most clickable option to
125
00:10:06,000 --> 00:10:11,000
people. Can you just talk us through what alternatives there are out there and when
126
00:10:11,000 --> 00:10:14,000
would you then consider equity release as an option?
127
00:10:14,000 --> 00:10:18,000
So I think the important thing is for people to look at everything they have
in their position.
128
00:10:18,000 --> 00:10:23,000
Do they have other savings, investments or pensions that they could draw upon if it
129
00:10:23,000 --> 00:10:28,000
was purely some income supplementation that they're looking for? With equity release,
130
00:10:28,000 --> 00:10:31,000
one of the important things is for people not to think that they can release a sum of
131
00:10:31,000 --> 00:10:35,000
money and have it in the bank and then draw from it when they want to because in reality
132
00:10:35,000 --> 00:10:39,000
that interest is rolling up. So what we'd encourage people to do is explore whether
133
00:10:39,000 --> 00:10:44,000
they've got any other savings investments they could call upon first of all. Obviously
134
00:10:44,000 --> 00:10:48,000
to have the downsides in conversation because sometimes actually people might, that might
135
00:10:48,000 --> 00:10:53,000
be right for some people but not for others. Or even if there's other family members involved.
136
00:10:53,000 --> 00:10:56,000
You know often it could be I'm talking to people about equity release who still have
137
00:10:56,000 --> 00:11:01,000
parents that are alive and you know there might be some sort of other family members
138
00:11:01,000 --> 00:11:07,000
that can give help. The other thing with equity release is to be really mindful of is what
139
00:11:07,000 --> 00:11:12,000
people are looking for in terms of releasing this sum of money because if people are looking
140
00:11:12,000 --> 00:11:17,000
to supplement income and not in requirement of a large lump sum for a specific purpose,
141
00:11:17,000 --> 00:11:22,000
for example to repay a mortgage, then draw down option is actually more frequently used
142
00:11:22,000 --> 00:11:27,000
now. Draw down would be where you would release the initial sum of money that you need but
143
00:11:27,000 --> 00:11:33,000
you would actually ring-fenced a further portion of money that you don't pay interest on until
144
00:11:33,000 --> 00:11:37,000
you draw it down. This means people can release what they need now, do with it what they need,
145
00:11:37,000 --> 00:11:44,000
they can then go back and draw down on regular occasions later on and then that way they're
146
00:11:44,000 --> 00:11:48,000
only paying interest on the amount of money they've actually released.
147
00:11:48,000 --> 00:11:53,000
Okay so you don't have to release the whole amount in one go, you can start with a portion
148
00:11:53,000 --> 00:11:57,000
and then revisit it and release more and more as you go along.
149
00:11:57,000 --> 00:12:02,000
And also that makes it a much more simple process to actually access the draw down part
150
00:12:02,000 --> 00:12:05,000
because the one thing with equity release is you know it is entering into a mortgage
151
00:12:05,000 --> 00:12:12,000
agreement with the lender so there will be a lot of legal steps to go through so you
152
00:12:12,000 --> 00:12:17,000
know it can take maybe 8 to 12 weeks to arrange everything. With draw down you've already
153
00:12:17,000 --> 00:12:21,000
done all that so then you know it could be the following year and somebody says actually
154
00:12:21,000 --> 00:12:25,000
I'd like to release another portion it's a much more straightforward and speedy process
155
00:12:25,000 --> 00:12:26,000
for them.
156
00:12:26,000 --> 00:12:32,000
So you and I know more than anyone that things are constantly changing in the financial space
157
00:12:32,000 --> 00:12:38,000
and in the financial world and you know change to legislation, changes to products, so how's
158
00:12:38,000 --> 00:12:43,000
that also impacted equity release and how are things evolving in that space as well?
159
00:12:43,000 --> 00:12:48,000
I think the main thing is it's becoming more and more of a flexible product. As I've said
160
00:12:48,000 --> 00:12:52,000
previously with regards to people who are thinking that actually you take out an equity
161
00:12:52,000 --> 00:12:57,000
release the interest rolls up and you know you can't do anything to slow that down. The
162
00:12:57,000 --> 00:13:03,000
reality now is you've got those options built in so actually allowing people to not commit
163
00:13:03,000 --> 00:13:07,000
necessarily to making payments and through to the end of the term but actually just to
164
00:13:07,000 --> 00:13:12,000
decide what suits them best. So more flexible products are coming out into the market, this
165
00:13:12,000 --> 00:13:16,000
will allow people to actually decide how much they want to pay and how long they want to
166
00:13:16,000 --> 00:13:21,000
pay it for. So somebody could come into this product and say okay I'm comfortable making
167
00:13:21,000 --> 00:13:26,000
X amount of payments over so many years and then I'd like to stop but actually if they
168
00:13:26,000 --> 00:13:31,000
needed to stop sooner then they can, they're not going to be penalised. Also when it comes
169
00:13:31,000 --> 00:13:36,000
to early repayment, I've talked about early repayment charges and how these can fit in
170
00:13:36,000 --> 00:13:41,000
as well. So you may have a client that has no intention of ever paying that loan off
171
00:13:41,000 --> 00:13:45,000
and they're quite happy with that and other clients may say well actually I just need
172
00:13:45,000 --> 00:13:50,000
this for 10 years. There may be an element of an early repayment charge coming in there
173
00:13:50,000 --> 00:13:56,000
but what we've found is actually the products, the early repayment periods are becoming shorter.
174
00:13:56,000 --> 00:14:00,000
So they've even introduced products now where there's a nil early repayment period and an
175
00:14:00,000 --> 00:14:05,000
early repayment charge, just to explain what that is, that is where somebody is repaying
176
00:14:05,000 --> 00:14:09,000
early a bit like when you fixed your mortgage rate for two years, the lender is expecting
177
00:14:09,000 --> 00:14:13,000
to receive that amount of interest on
that money that you've borrowed. The same with
178
00:14:13,000 --> 00:14:17,000
equity release and it may be that you've got a product with a 10 year early repayment charge
179
00:14:17,000 --> 00:14:22,000
and then this will gradually reduce down. So let's say on year one it might be 9% of
180
00:14:22,000 --> 00:14:26,000
what you've borrowed, it will be quite high, then each year it will gradually reduce down
181
00:14:26,000 --> 00:14:32,000
say 8% in year two, 7% in year three and so on. But depending on the client's circumstances
182
00:14:32,000 --> 00:14:37,000
there are products out there with much shorter early repayment charges, they often come with
183
00:14:37,000 --> 00:14:40,000
a higher interest rate so there'd only be specific circumstances where that would be
184
00:14:40,000 --> 00:14:46,000
the right product to use. So this is where it's really clear the importance of people
185
00:14:46,000 --> 00:14:50,000
getting the right advice, making sure that if equity release is right for them that actually
186
00:14:50,000 --> 00:14:56,000
then what type of loan are we looking at for them, what sort of options and flexibility
187
00:14:56,000 --> 00:15:02,000
do they need so that then they're not going to be having difficulties in a few years in
188
00:15:02,000 --> 00:15:04,000
if their circumstances did change.
189
00:15:04,000 --> 00:15:09,000
One thing we've already talked about is obviously the risks involved in equity release and things
190
00:15:09,000 --> 00:15:16,000
that people should be considered before taking out an equity release product. But what would
191
00:15:16,000 --> 00:15:19,000
you say is one common misconception about equity release?
192
00:15:19,000 --> 00:15:24,000
I think the main misconception is the bad name that it had from many years ago. So in
193
00:15:24,000 --> 00:15:29,000
the past this is where equity release did have quite a bad press for many years, there
194
00:15:29,000 --> 00:15:34,000
wasn't the flexibility in there, there also wasn't the regulation that there is now to
195
00:15:34,000 --> 00:15:38,000
ensure that people don't borrow too much if they're too young, leading them into that
196
00:15:38,000 --> 00:15:43,000
negative equity position that we talked about earlier. So people just need to be very aware
197
00:15:43,000 --> 00:15:48,000
of what they're doing and why they're doing it. Another important thing is involving the
198
00:15:48,000 --> 00:15:53,000
family in the conversations. I encourage clients to bring family into the meetings to make
199
00:15:53,000 --> 00:15:57,000
sure everybody is aware of what they're doing. And often it's the case that they are doing
200
00:15:57,000 --> 00:16:01,000
this to help the children anyway, so it's not a question of that the children are going
201
00:16:01,000 --> 00:16:06,000
to potentially inherit less, they're going to inherit sooner, may mean then that what
202
00:16:06,000 --> 00:16:09,000
they might inherit at the end may be less, but actually they've had the money when they
203
00:16:09,000 --> 00:16:16,000
need it. So I think the main thing is involving the families is really important and also
204
00:16:16,000 --> 00:16:20,000
getting the right advice, making sure that the product is right for them, like we talked
205
00:16:20,000 --> 00:16:24,000
about with the early repayment charges, again that can be worse, that could trip somebody
206
00:16:24,000 --> 00:16:25,000
up.
207
00:16:25,000 --> 00:16:30,000
And you mentioned there about involving family within the process if they were to take the
208
00:16:30,000 --> 00:16:35,000
steps into taking out an equity release product. So what else should someone do if they are
209
00:16:35,000 --> 00:16:39,000
considering taking out equity release and what are the steps involved?
210
00:16:39,000 --> 00:16:44,000
So I think the main thing is really important to be getting advice, exploring all options
211
00:16:44,000 --> 00:16:48,000
first of all and if then we are arriving at equity release being the most appropriate
212
00:16:48,000 --> 00:16:54,000
option then really sitting down and thinking about how is that going to work for them,
213
00:16:54,000 --> 00:16:59,000
do they want to make payments. Cash flow planning really does come into this as well because
214
00:16:59,000 --> 00:17:03,000
to see where people are going to be sat in future years, making sure that the type of
215
00:17:03,000 --> 00:17:06,000
loan that they are going to take out meets their requirements. They are not borrowing
216
00:17:06,000 --> 00:17:11,000
too much or making sure they have borrowed enough.
217
00:17:11,000 --> 00:17:15,000
Thanks for that Sarah and thanks very much for coming in today and explaining all things
218
00:17:15,000 --> 00:17:21,000
equity release. As always with our episodes please be aware that everything that we have
219
00:17:21,000 --> 00:17:25,000
discussed does not constitute as financial advice and that the content that we release
220
00:17:25,000 --> 00:17:31,000
is for educational and informational purposes. If you did want to get in touch to discuss
221
00:17:31,000 --> 00:17:37,000
equity release or any of the other topics that we do talk about then please do get in
222
00:17:37,000 --> 00:17:43,000
touch via our website at loomandwealth.co.uk