The many faces of Equity Release Mortgages
May 28, 2014
Back in 2004 when I was Head of Marketing at the Stroud & Swindon Building Society we joined the SHIP (Safe Home Income Plans) committee, which has now morphed into the Equity Release Council; the industry body that ensures equity release products are safe and accessible for consumers.
At that stage, equity release mortgages had just started coming back into fashion, following many years of negative publicity when they were not regulated and sadly some home owners had their fingers burnt. However with the introduction of regulation of Lifetime Mortgages, as they are known in 2004, this booming market has grown into a £1 billion a year business.
Today I’m pleased to say that the equity release market is fully regulated by the Financial Conduct Authority (FCA) which ensures consumers are protected and that all companies selling these products employ fully trained and qualified staff.
How has equity release changed?
Apart from the regulation, once of the biggest changes to equity release apart from the type of plans available which I will touch on shortly in a separate blog, is the way people spend the money.
Of course you can choose to do just about anything with your newly released cash. Going back 5 to 10 years ago people mainly used the money to have an extension, a holiday or a new car but today people are thinking more about their later life plans, using the money to supplement their pension income or just to enjoy their retirement years.
People have started to think differently about the equity they have tied up in their homes. It is no longer a nest egg that is nurtured and grown to leave as an inheritance for children or grandchildren. In truth many children are better off than their parents anyway!
These days children actually encourage their parents to release equity from their home in a bid to see through their days in comfort without having to worry quite so much about scrimping and saving.
How times have changed.
The potential mortgage time bomb
Of course there is another reason for releasing the capital from your home which is only just starting to materialise but could be absolutely massive in its impact on homeowners all over the UK. Yes you’ve got it, the interest only mortgage!
Over 2.5m people currently have mortgages that only require you to pay the interest, with only a small percentage having the means to repay the capital when the mortgage term ends. So what happens then? A potential time bomb given the reported figures in question.
Lenders have already started to head off the issue by sending annual reminders to these customers asking them to ensure they have a repayment vehicle in place but personally I think this is more to do with fending off a potential mis-selling scandal of the future. Stable door and bolting horse come to mind!
Until the recent financial downturn, lenders were only too happy to lend you as much as possible on an interest only basis, secure in the knowledge that their money was safely secure in bricks and mortar. But now the time bomb is getting ready to blow, can UK lenders really think it is acceptable to force what could be 100,000’s of families onto the streets when the time comes to repay the debt?
Enter the shining knight that will save most lenders and their customer’s severe embarrassment and much worse; the equity release mortgage. Subject to the prevailing rules at the time, you will be able to convert your interest only mortgage into a shiny new equity release mortgage.
Then of course there is the timely issue of using equity release loans to help with paying for long term care, or to supplement a dwindling state pension in order to maintain a reasonable lifestyle.
I am not saying that releasing equity is the answer to everything. It is certainly a good idea to have a reputable financial adviser explore the alternatives with you, such as using your savings, downsizing or asking other family members to assist if you are thinking about future finances in this way.
At the end of the day, your home is probably your biggest asset so the decision to release equity from it should never be taken lightly.
Having said that, for some, equity release could be the hero that saves the day.
But is it right?
Releasing equity from your home has never been better regulated, but that doesn’t mean that it’s right for everyone. It all depends on your personal situation and your attitude to saving for your family’s inheritance versus enjoying your hard earned cash and living for today.
There is no right or wrong, but there is no denying that the equity release market has grown up and I believe as a nation we have started to view it from a different perspective.
If you or your parents are considering exploring this route, involve the immediate family as it’s a big decision and wise to involve those closest to you, rather than them finding out when you are no longer around.