Over 55-year olds could be better off moving to a lifetime mortgage, as a drying up in the number of conventional mortgages and mortgage products, and increasing prices, threaten homeowners’ financial stability.
Modern equity release products can really come into their own in cycles such as now as funding dynamics change so rapidly. But have advisers kept themselves sufficiently up to date with the latest innovations in order to be able to show clients all the available options?
Over 55s worried about coming off their fixed-rate mortgage and the potential of losing their home should very certainly seek advice about the suitability of an equity release policy instead of remortgaging.
This year, some 2.76 million homeowners are coming off fixed-rate mortgages with an average rate of 4.8 per cent, and are facing a move to significantly higher rates. Some of these customers will be over 55 and with a loan-to-value ratio low enough to consider a lifetime mortgage.
Lifetime mortgages
The lifetime mortgage interest rates, fixed for life, on certain equity release products start from a competitive 5.92 per cent, including interest only options from 6.25 per cent, where the client elects to pay the interest each month to avoid the roll-up of interest.
Some homeowners have found themselves in a dreadful trap of borrowing on credit cards with high interest rates because they live in fear of losing their home if they miss a payment. Bank of England figures showed that there was a significant increase in credit card debt in September, with industry commentators concluding many were borrowing on cards to meet mortgage payments out of fear of losing their homes.
Modern lump sum lifetime mortgage products can be used to pay off, for example, outstanding mortgage balances and debts, such as credit card debt, which are carrying increasingly high interest charges. Essentially these lump sum products can give homeowners access to funds to clear the debt, get out of the negative cycle and move into retirement with certainty and less stress.
In addition, Lifetime Mortgages approved by SHIP (Safe Home Income Plans), the industry body championing high standards of delivery from UK equity release providers, come with a number of important safeguards for homeowners which are not available on traditional mortgages. For example, a “No Negative Equity Guarantee”, so there is never a risk of the homeowner owing more than the value of their property.
Interest only
Interest only lifetime mortgages can also feature a specific safety net whereby, if the homeowner misses an interest payment, or opts not to make payments, the product converts to a conventional lifetime mortgage whereby the interest is added to the loan and rolls up, and the capital plus the rolled up interest is repaid when the homeowner either dies or moves into long term care. Thus, the provider will never repossess the property because the client cannot keep up repayments. With a traditional mortgage, interest has to be paid on the loan every month or the homeowner faces the risk of losing their home.
Many advisers have not kept abreast of product innovations and older homeowners are facing a ticking time bomb that could seriously affect their retirement planning in the most critical stage. It’s time for mortgage brokers, financial advisers and the media to weigh up the merits of equity release products against traditional mortgages in today’s environment. We’re not saying it is right for everyone, but there are homeowners out there for whom it is absolutely the best option.
Demand
At a time when the demand for many other financial products is in decline, the demand for equity release is holding up relatively well. SHIP statistics in Q2 2008 showed, in fact, an increase of 14 per cent in volumes of business written compared with Q1 2008. Given that advisers typically earn in excess of £1,500 per case, at a time in particular of declining income from other financial products, equity release therefore offers an important potential additional source of revenue for advisers.
In order to be able to advise on FSA regulated equity release products, advisers are required to have specific equity release qualifications. However for many advisers the additional qualifications required are relatively straightforward. The exams cost £145 and, depending upon experience, take approximately a week’s study time to complete. Moreover even if the adviser is not qualified to sell the product, they can earn fees from referring the lead to other advisers who are qualified in this area.
The equity release market has come a long way in the last few years.
The products are far better designed, highly flexible, attractively priced and offer a wide range of guarantees for customers.
The products are designed to meet a wide range of customer needs and are particularly well suited in current difficult market circumstances to meet the needs of older homeowners who are looking to re-finance an existing mortgage or who have other more expensive types of debt.
Far from being a product of last resort, which is the way that some commentators used to view equity release in the past, equity release should now be considered as a sensible option for many older homeowners to consider.
Small type:
Note: Readers should not make financial decisions on the basis of this article. Homeowners should seek specialist financial advice if they wish to investigate the matter further in relation to their own circumstances.
