The young man sitting in our office was suddenly concerned.
His mother, in her 60s, had asked him to come in, so we could help explain some of the changes she was making to her estate.
It was all going well, until our financial advisor uttered two words which are liable to send shivers down the spine of anyone over the age of 30.
She had mentioned “Equity release” (sometimes known as a “lifetime mortgage”).
That is when you withdraw money against the value of your home.
You can do this without selling your house, and the debt is usually repaid posthumously out of your estate.
It is a way for people over the age of 55 who own their own homes, but are short of cash, to be able to access some of the money (equity) they have already accrued by paying off their mortgage.
So why did the young man in our office react so negatively? And was he correct to do so?
For a long time, people thought of equity release as a high-risk product targeting impoverished pensioners and other vulnerable people.
People were afraid that if they took out all the money they had already invested in their house, and the interest rolled up, their children would end up with nothing to inherit.
If you have spent years paying off your mortgage, you don’t want to end up having nothing to show for it!
And for many years, that fear was justified.
Interest rates were high, and the equity release market was not well regulated. It was risky.
You were sometimes forced to release more equity than you really wanted, and repayment options were quite inflexible.
But while many people – like the young man in our office – still think of equity release negatively, a lot has changed in the last few years.
Equity release is now much more closely regulated. The Equity Release Council sets stringent rules on what is allowed, so products on the market are safer than ever before.
The demand for equity release is high and it’s increasing in popularity.So lenders have started developing new equity release products that are much more flexible, and that people actually want and their families are more comfortable with the new design of these products.
There were twice as many equity release products available in January 2019 as in January 2018.1 So you have a lot more choice and a better likelihood of finding one that suits you.
And the old inflexible rules have dramatically improved.
Most new plans now charge no early repayment fees, and many let you borrow smaller increments over time, or repay the interest separately to prevent it eating into your remaining equity.
Lastly, interest rates on equity release used to be shockingly high, and compounded so that gradually you lost more and more equity in your home.
Now that the rates are much lower, it doesn't add up to so much over time. So, depending on how much equity you have released, you are much more likely to have equity remaining in your house, to leave to your beneficiaries.
Equity release today is a different species compared to its disreputable ancestors of the 1980s and 1990s.
Once the young man in our office understood this, he was reassured.
And soon, he accepted that it was a good option for his mum, whose pension was leaving her short every month.
She would get the funds she needed to live comfortably day-to-day. And there would still be equity left in the house for him to inherit one day.
You, too, should not dismiss equity release out-of-hand.
In many cases, it can be a sensible way of raising cash if you are short day-to-day, or if you want to invest in your property or help your children or grandchildren, if you have them.
I’m going to tell you more about when you should consider equity release in my next blog, so watch out for that in a couple of weeks’ time.
But in the meanwhile, if you want to find out whether equity release might help you, contact us today for impartial advice.
We'll help you work out whether it is right for you, and identify your best next steps.
1 Equity Release Council January Report, 2019, page 2
Topics: financial planning