Equity Release

19th September 2008

Reader Writes:

I have had an adviser telling me to release equity from my property but I am concerned about it as the salesman was pretty pushy. I also know that David Blunkett was telling people to release equity and thinks it’s a good idea.

I did read the report and I have to say I nearly choked. On one hand we are being told we aren’t saving properly, on the other we have children coming out of school and straight into debt at university and now we have Mr Blunkett telling us we should get into debt and spend our money before we die. Nice touch.

Let's get something very straight on 'equity' release. If you live in a house and take out an equity release or lifetime mortgage as it is now called, you are simply getting into debt. Dress it in any way you want, but that’s all you are doing. Mr Blunkett is effectively saying that all pensioners who have a house with no debt should get some.²

He referred to retirees having £700bn 'tied up' in their house. What? I was at my in laws' yesterday and have been in my parents loft and I can't see a penny anywhere.

It is clear with the management of the economy that the government know spending is poor on the high street and the average person has little or no savings. This cash would be an extra stimulus. Pensioners diving into debt to bail out an economy is hardly a good idea. I'm folding over here with laughter. The former secretary of state for work and pensions said they (pensioners) should be prepared to use their homes to pay for care rather than leaving it to relatives, a comment that I am sure will disgust most of us.

Pensioners have paid their taxes and paid their way. The government has had a massive period of sustained growth and has not saved for today's rainy 'days' and the pensioners are expected to bail them out. Not on your Nelly sir.

This has fuelled a number of financial advisers to talk up equity release and try to sell it to customers. One such case involved the adviser telling the customer that if they borrowed against the house they would be making a killing because the interest repayment was 7.2% but houses increase by way over 10%, so they should be happy with that. Are these salesmen for real?

House prices are plummeting and will continue to do so. I notice prices at auction are now selling at a 23% discount, a sure sign where the forced market is today.²

If you really need money, and I mean really need it, consider a number of items first:
Find out about fees and grants as well as trading down before using equity release.
Seek advice from an independent financial adviser who just charges a fee as they will be independent of you taking any action. 

Check to see what impact the equity release plan will have on your state benefit. Consider the drawdown option. Some companies allow you to set up the scheme but borrow when you need it. This will save you a lot of interest. Make sure you have the freedom to move to another property if needs be at a later stage. 

Ensure the firm you use are members of SHIP. They are required to provide a fair, simple and complete presentation of their plans. The benefits, obligations, variables and limitations must be clearly set out in their literature, including all costs which the applicant has to bear in setting up the scheme as well as the position on moving, the tax situation and the effect of changes in house values. 

They also ensure a no negative equity. In the last ten years with 40 staff we have less than ten on our books! That will give you some perspective. 

For a free tip sheet on equity release or if you would like any advice call Peter on 0800 0112825, e-mail info@wwfp.net or take a look at our section on mortgages.

Source:-
¹FT

For lifetime mortgages to understand the features and risks ask for a personal illustration
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.