Releasing equity from your property has its risks: many home-owners are often marketed this option as an easy way to put cash in their bank account, yet for many, it is the most expensive way to do that. The Financial Services Authority (FSA) is also worried about products that are marketed as no cost or low cost. Everyone interested in equity release needs to be fully aware that their home is at risk. Whilst equity release can be a good idea, it will only be so if home-owners go in with their eyes wide open.
I'll mention some important risks and tips in a moment but initially I would echo the FSA's concerns. The regulator has mentioned a plan called 'Crossroads' which is offered by a company called Asset Income Plan Limited. In its promotional material, it claims to pay an annual income to individuals of 5% if they transfer 50% of the value of their property over set periods of time. FT Adviser reports that in order to receive this income the home-owner must allow an insurance company to take a legal charge over the property, of up to a maximum of 50%. The FSA have concerns over the wording and risk and remind home-owners that an insurance company having a legal charge means the company effectively has rights over the property.
The FSA also reports in FT adviser (1) that the product information states 'the only risk of having to sell your home would be if the insurance company became insolvent and that this was reduced because the product was covered by capital risk insurance'. The FSA reports that it is not clear if this is correct.
Perhaps most worrying in the report is that Crossroads is not regulated by the FSA, which effectively means its advisers and providers do not need to be regulated by the FSA. At the time of writing they still couldn't confirm whether or not this was true. Of course, if this is correct the home-owner would have no protection via the ombudsman or via the Financial Services Compensation Scheme (FSCS).
A homeowner considering an equity release plan should seek advice from an Independent Financial Adviser who is not focused on commission and will give clear advice and guidance. An equity release specialist is best as they have to pass specific examinations and will be focused on giving you clear guidance and advice.
They will begin by deciding whether or not you really need to borrow or sell off part of your home. They will discuss what grants may be available, the impact of releasing money against any means tested benefits and whether or not there is a better way to borrow.
For example, we have seen many situations where the children have simply bought some of the property from the parents. This gives the parents the cash they need and the children know an insurance company isn't making lots of money from their parents and their potential inheritance.
The equity release specialist would also consider which equity release schemes are best and would analyse the small print of each one to ensure you are fully aware of the risks. They would also ensure every scheme is part of the Safe Home Income Plan (SHIP) to cement the guarantees SHIP gives to its members.
SHIP's guarantees (2) mean customers can remain in their property for life as long as it is their main residence. It ensures providers offer fair, simple and complete presentations of their products, including all costs. It should also include taxation issues and the impacts of house value changes on the loan. Other key benefits are the ability to move the equity release plan at a later to stage to another suitable property without penalty. There are other guarantees, but a vital guarantee is the no negative equity guarantee meaning you will never owe more than value of your home.
It doesn't have to be complicated so the simple steps above will ensure you release any equity safely.
Call Peter on 0845 230 9876, e-mail email@example.com or take a look at our website www.wwfp.net.
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.
(1) FT adviser information: www.ftadviser.com/FTAdviser/Mortgages/Products/EquityRelease/News/article/20110414/f2e9a226-6667-11e0-8524-00144f2af8e8/FSA-warning-over-no-cost-equity-release-products.jsp
(2) Check the SHIP website for the latest on guarantees
1 . To allow customers to remain in their property for life provided the property remains their main residence.
2 . To provide customers with fair, simple and complete presentations of their plans. This means that the benefits and limitations of the product together with any obligations on the part of the customer are clearly set out in their literature. It should include all costs that the customer has to bear in setting up the plan as well as the tax implications, their position on moving house and the effects of changes in house values on their loan.
3 . The right to move their plan to another suitable property without any financial penalty
4 . The right for the customer to choose an independent solicitor of their own choice to conduct their legal work. The firm must provide the solicitor with full details of the benefits their client will receive prior to the completion of the plan. The solicitor only signs a certificate once he or she is satisfied that their client fully understands the risks and benefits of the plan.
5 . The SHIP certificate signed by the solicitor is there to ensure clients are aware of the terms and implications of the plan including the impact of equity release on their estate.
6 . All SHIP plans carry a no negative equity guarantee. This means customers will never owe more than the value of their home and no debt will ever be left to the estate.