Equity Release?

Equity Release? – Which type of scheme  is right for you?

The number and design of equity release mortgages has evolved to suit the needs of those who most need this type of product. There are now two types of Equity Release Mortgage available .

They have become safer, more efficient products with the loans tailored to help resolve the financial concerns of those who need to access this type of facility.

A recent meeting with a client, a single retired woman with no family brought to my mind the true value of equity release.

The financial circumstances were that she had a small occupational pension, the full state pension and a small investment fund.

She found herself stressing on how to get by on the income which never seemed to cover the increasing cost of surviving (not living); furthermore she worried as her investment eroded every time she had to en-cash part of it to keep herself going.

She lives in a house in Surrey worth £400,000.

The two types of mortgages are as follows:-

  1. A Lifetime Mortgage where the borrower doesn’t have to make any monthly interest payments. The interest is added to the loan on a monthly basis so the amount of the loan will rise over time.
  2. The Home Reversion Plan is another type of equity release arrangement that isn’t really a mortgage. The providers of this type of scheme effectively purchase a percentage of the value of the property, at a discount. The home owner retains the legal right to remain in the property until they die, sell it or go into care. On selling the property, the provider takes its agreed percentage, with any balance being paid to the client or their next of kin, so the intended beneficiaries always know exactly what percentage of the value of the home they will inherit.

Which of these two types is the right choice ?

It is only an experienced specialist Independent Financial Adviser who, having assessed your individual requirements, will be able to research the whole of the market for a suitable lender and mortgage product.

There are various options available:-

  • A lump sum, to spend as you wish, such as a deposit for grandchildren to purchase their first home, or fund their university fees.
  • A small remaining mortgage can be repaid before the funds can be utilised for other purposes
  • Use the loan to serve as a regular income plus “ad hoc” lump sums as required.
  • Use the loan as a reserve account (like an overdraft facility).
  • You can protect a percentage of the equity (value) in your home to safeguard any legacy.
  • Make monthly interest payments in order to limit the size of the loan (depending on the type of scheme used)
  • Borrow against a holiday home, let property or main residence.
  • Proof of income is not required.
  • Interest rates can be fixed for the life of the loan.

The lifetime mortgage option will not lend as great a percentage of the value of the house as a home reversion arrangement because this type of mortgage adds the monthly interest which increases the size of debt, unless you choose the make the monthly interest payments.

A home reversion plan works by buying a percentage of the value of the home and then passes a percentage of this amount to you as cash or income; the difference between the percentage that they buy and the percentage that they pass to you represents the provider’s gross profit before costs and expenses.

My client found that an equity release mortgage solution has transformed her financial position and lets her sleep well. Which is best for you?

For an initial consultation about Equity Release at our expense please contact Gordon Tate Associates on Tel: 023 92 571183

 

MYTHS ON EQUITY RELEASE MORTGAGE

It often amazes me as to the number of telephone calls I receive from solicitors and accountants that relate to the following theme:-

“Gordon, you know I don’t like or believe in  the Equity Release Mortgage, BUT, I have racked my brains for an alternative, suitable answer to my client’s financial problems and Equity Release seems to be the only logical solution.”

I usually reply “that Equity Release mortgages are only bad when the wrong product is mis-sold to the wrong people, in the wrong circumstances at the wrong time”.

There are circumstances when these loans can help clients resolve financial pressures. I only investigate whether they are appropriate having exhausted looking at all other options.

Equity Release Mortgage case studies:-

The following case studies give examples of where equity release really helped to improve these clients financial position.

  1. An accountant contacted me as his clients in their 70’s had taken on so much debt that all of their income were taken to service the debts. They had not gone into arrears but were having difficulty in servicing the loans, in fact the pressure was so great they could not afford to live and would soon have credit arrears problems. 
    • With the agreement of their only child, I arranged an Equity Release mortgage. This repaid all of their debts and released income to fund their lifestyle.
    • The clients were so relieved with the outcome and the accountant was kept informed during the whole process.  The client’s, their son and the accountant were all made aware that the lifetime mortgage has not eradicated the debts, and that interest is still being added annually which will obviously reduce the eventual inheritance that their beneficiary will receive.  However, they now no longer have to worry about mounting debts and lack of income to live on.
  2. A solicitor contacted me with a client, a widow, with no living relatives.  She had a large bungalow, had developed arthritis and was therefore unable to maintain her beloved garden.  She couldn’t afford a gardener or pay for much needed repairs to the property. The property had been her marital home and she could not bear to sell leaving her memories behind.
    • The first thing we did was to ensure that she was receiving her full state benefit entitlements, then, we arranged an initial release of money so she had sufficient funds available to carry out the repairs, enjoy a holiday and provide a reserve from which she could draw to pay a gardener.
    • The result was wonderful for this lady who is now so relaxed knowing that she has sufficient money to fund her lifestyle. A satisfactory outcome. She was made fully aware that the interest would be added to the loan every year, thereby reducing the amount of inheritance that would be left to her beneficiaries, however, as she assured me that she had no living relatives she and her solicitor were happy with this outcome believing that whoever inherits her estate should be glad to receive whatever is left.

I do come across some horror stories. I met a lady who had gone direct to a lender some years before. She has found that Equity release can be a nightmare. The lender in question did not have a suitable product to meet her circumstances yet pressed her to take a product which was not really suitable. The lender is now no longer trading so she finds herself locked into a loan that doesn’t suit her circumstances and causes her considerable stress.

Going direct may have attractions to some clients, yet this experience emphasises the need for clients to seek independent advice when investigating whether an equity release mortgage is the right solution.

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Avoiding an equity release disaster

Equity release mortgages may be a useful way of releasing money to fund a wedding or holiday, grandchildren’s education or their deposit for a first home, long-term care fees, or simply ensuring there is sufficient income in retirement – while still retaining the family home.

With the right advice, equity release schemes could be an excellent way of releasing cash from a property. But if you don’t take advice, they could turn out to be a disaster.

It’s a stark, uncomfortable fact but one that was underlined recently by the following cautionary tale of a lady who went directly to an equity release lender on the strength of a newspaper ad, instead of consulting an independent intermediary.

What she didn’t realise was that an independent adviser would have checked out whether the loan represented value for money, was competitively charged and suitable for her needs.

It turned out she could have got a much better deal had she used the services of an independent adviser, who would have:

  • Made sure that fees were fair rather than exorbitant.
  • Checked the client had the right income options of a lump sum or a regular income.
  • Arranged the correct type of equity release mortgage for her needs.
  • Structured the loan so she could get extra money without punitive penalties or charges.
  • Taken responsibility for the advice and backed it up with a formal letter of recommendation.

An independent financial adviser will always highlight all the options and allow the client to make informed choices about the correct loan for their circumstances.

If you have any questions about the best equity release mortgage for you, I’d be delighted to help.

Buying your own premises – a tax-efficient way

Using a pension plan to buy your own business premises and save on tax is an idea that strikes me as making great sense all round.
You’ll need to speak to a good tax accountant and take their advice. Here is a way to use a Self Invested Personal Pension Plan to assist with the purchase.
How does it work?
The pension plan has a fund of money that is converted to cash and used by the pension fund trustees to purchase the
commercial premises. Because the pension plan can also raise a mortgage of up to 50% of the cash fund value, you can buy property costing 150% of the fund value.
Benefits:

  • The business pays rent to the pension fund and receives tax relief on the rent paid.
  • The pension fund pays no tax on the rental income.
  • If the property increases in value the pension fund pays no Capital Gains Tax.
  • On retirement the property can be sold and the amount raised could be converted into a retirement annuity, this will generate a secure income for life (though this would be taxed as earned income).
  • Alternatively, the property can remain in the pension fund and still receive tax-free rent from any new tenant. The client, as owner of the pension fund, can then derive an ongoing income through what is known as a pension drawdown plan.
  • The property is protected if the business goes into liquidation.
  • Heirs can inherit if the owner dies early.

Altogether, this could be a very tax-efficient way to purchase business premises.

Why not talk to your Independent Financial Adviser for more innovative ideas on pensions, property and tax?