Q: Equity release is a very complex area, but one which I am keen to get more involved in. What advice should I be offering to clients who enquire about the options?
Eddie answers: There are currently more than 11 million pensioners in the UK and this figure is expected to rise dramatically from 2021 onwards. With this in mind, brokers are right to look at the opportunities that equity release has to offer. On the other hand, it is a complex area and one in which there have been many accusations of mis-selling in the past. So it’s important to ensure that you have the facts to hand before dispensing advice on the subject.
Get informed
Brokers who already enjoy strong relationships with clients that may be considering equity release as an option are in a particularly good position, as they can build on these relationships. However, specialist knowledge is a necessity, so any broker advising on this sector must commit to being extremely well-informed on the wide range of issues involved.
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Safe Home Income Plans (SHIP) is, without a doubt, the best source of industry information on equity release products. Formed to promote high standards and good practice for equity release products, SHIP was set up in the 1990s to safeguard against the problems that many had previously encountered in the market.
It is important to fully understand the differences between lifetime mortgages and home reversion plans, both of which are now regulated by the Financial Services Authority (FSA). With lifetime mortgages, there are no other mortgages on the property and the borrowers have to be at least 55 years old. The owner takes a loan out against their property, which is given by the lender as a lump sum, and interest is charged as usual. The borrower does not have to pay back the loan or interest until they either die or have to go into full-time care. At this point the lender makes a charge against the property and claims back its original loan and all the accumulated interest from the proceeds of the sale of the house, with the remainder of the proceeds going to the estate.
With home reversion plans, the home owner sells off a percentage of their property to the reversion company for a fixed, one-off lump sum payment. In return, when the owner dies or goes into full-time care, the home reversion company takes their percentage of the proceeds of the house sale, which will include any profit they have made from the increase in the value of the property.
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Good practice
Because brokers are dealing with the elderly they must be scrupulously compliant not only with FSA regulations, but also by following advice and guidance notes published by organisations such as the Council of Mortgage Lenders and old age charities.
The following guidelines should help when advising your clients and establishing good practice:
- Be prepared to take much longer to explain the products available.
- Be conscious and respectful of the client’s age. Elderly clients are often anxious before entering into major financial obligations. Patience, jargon-free language, a full explanation and time are essential in reassuring clients in these cases.
- Any products you sell should belong to SHIP-approved schemes.
- Lenders’ quotes must be clear, with illustrations showing how the outstanding loan balance increases over time.
- Inevitably, the value of the client’s estate will be reduced, so their children and other beneficiaries of their estates should be involved from the beginning.
- Welfare benefits may be affected when entering into such a scheme.
- Clients should instruct an independent solicitor experienced in equity release cases. The lender will require the solicitor to sign a SHIP certificate (confirming compliance with SHIP’s Code of Practice), before any funds are released. As such, the solicitor instructed should have the specialist knowledge necessary to conduct such a case and be able to provide the clients with clear, unambiguous advice.
- Advice from the solicitor should also be sought by the client on whether or not to make a will.
- Remember to bear in mind that the knock-on effect of equity release on a customer’s individual circumstances can be much greater than for a standard mortgage, impacting on their tax liability, any benefits they might be claiming, as well as their personal and family life.
- In terms of timescales, it is best to be realistic. Most remortgages will complete within 10 days of the solicitor receiving the offer of mortgage, but this is highly unlikely to happen in a lifetime mortgage case, due to the nature of the transaction and the involvement of two sets of solicitors. Four weeks from receipt by the client’s solicitor of the offer of loan should be more than enough time.
- Good communication is paramount. Build a good working relationship with the lender and the client’s solicitor to ensure a smooth progression from start to finish.
