Over 55s are warned to take care when shopping for equity release to raise cash for their retirement savings from their homes by consumer champion Which?
After a undercover investigation, Which? discovered standards of advice varied widely across firms selling equity release plans.
Secret shoppers tested 22 advice firms – only two were credited with offering ‘excellent advice’ while four failed the test.
In 12 cases, equity release solutions advisers were average and failed to answer several key questions.
One adviser told a 75-year-old mystery shopper looking for cash for essential maintenance on their home to take out significantly more money than they needed and to invest the cash.
The consumer group claims this is ‘incredibly bad advice’ while yields on investments after tax and taking inflation in to account are likely to come in at much less than the cost of borrowing the money.
How equity release schemes work
Typically, equity release schemes offer two ways to draw against the equity in a property -
• Lifetime mortgages – A loan against the property value that rolls up interest and is repaid in full when you leave the property
• Home reversion plans – where a stake in the property is sold to a lender in return for cash
Both schemes let you stay in the home for as long as you wish. The principle is for over 55s with equity in their property to draw cash against the value to supplement pension income or to spend as they wish.
You can take the cash released as a lump sum, or by drawdown, which lets you take money up to a set limit whenever you wish.
Interest rates range between 6% and 7% and the debt often doubles in 10 years – making a £50,000 drawdown now a liability of around £100,000 ten years later. Lenders ensure the debt never outgrows the value of your home so your family is not left owing any money when you die or move in to long term care or a new home.
Equity release is offered by a wide range of providers, including financial firms like Aviva, LV= (Liverpool Victoria) and Bridgewater.
What to look for in an equity release adviser
The Which? Investigation focussed on five key factors, which they considered were important to the over 55s looking at equity release and essential points for any financial advisor to cover:
Disclosure
Good advisers should not discuss equity release with you until they have covered some basic points about them and their business:
• Status – whether they are independent or tied to particular providers
• Regulation – this stems from their status, but you need to know who to speak to if you have a complaint
• Market scope – will they offer whole-of-the-market advice covering all providers or product advice from a specific firm
• Fees – Pin down how much will their advice and setting up an equity release scheme cost
Finding out about you
Advising about equity release involves much more than just looking at the value of your home and how much money you can unlock.
A responsible financial adviser will look at your personal financial circumstances in detail to establish whether you can afford equity release, whether you already have savings and your debts.
Equity release explained
Once an adviser has explained their status and looked at your finances, the mechanics of any equity release schemes that suit your goals need explaining.
The explanation should cover how lifetime mortgages and home reversion work, what happens to the debt, the costs of borrowing and how equity release will affect your long-term financial plans – including what happens if house prices go up or down.
Alternatives
Equity release may be one of several financial options for you – and discussing your finances will highlight this.
The cost of equity release often makes downsizing, taking in a lodger or linking your finances with the family more cost effective.
Benefits
Taking out a lifetime mortgage can affect any means-tested benefit payments you receive. A good financial adviser will always discuss this with you.
Exit penalties
Equity release is a long term financial strategy that is aimed to continue until you die or permanently leave your home. Ending the scheme early can result in expensive early repayment charges. You need to understand what happens if you exit the scheme.
Equity release do’s and don’ts
Equity release is a specialist retirement solution aimed at retired homeowners with high-value properties, no savings, an average income and little choice of other financial options.
Do discuss taking out an equity release plan with your family, who may be expecting an inheritance or concerned about your financial well being.
Do have a trusted family member or friend present when you are discussing equity release with an adviser to make sure all the relevant points raised in this guide are answered.
Don’t sign any documents until you have read them thoroughly and understand the implications
Don’t forget some reasons for cashing in equity may have better solutions – for instance taking out a loan to help with age related conditions by remodelling bathrooms or access to the property may be covered by grants.
Do look at the alternatives as well as equity release.