Topic 7 - Equity Release Flashcards
Interest Roll Up Mortgage
- If a life annuity is purchased, payment is split between capital and income.
- Capital element is tax-free. Interest element taxable and paid net of 20%.
- Can be arranged on drawdown basis too.
Retirement Interest-only Mortgages
FCA Consultation in March 2018 - Introduced new category.
Primarily to aid those already on interest-only mortgage but with no repayment strategy in place.
Considered mainstream mortgage separate from lifetime mortgage rules
Repaid on death or entering into care.
Home Income Plans
Home income plans type of interest-only lifetime mortgage.
Cash raised used to purchase annuity.
Interest payments deducted froma annuity and remainder paid to borrower.
Those who started plan before April 1999 benefit from mortgage interest relief at source on first £30k of mortgage so most lenders set maximum at £30,000 to maximise benefits of plans.
Generally not viable for those under 80. For those over 80, benefits are marginal.
There is security as annuity and interest rate are fixed for life but income is insufficient to justify plan.
Like other interest-only mortgage, the extra income could exclude applicant from state benefits
Home Reversion
Part property is sold to provider but entiteld to live in it until they die or leave due to care.
Nominal lease payment, typically £12 per year.
Some schemes end after period but must be at least 20 years.
Cash is significantly less than market value - 35-60% depending on borrower. But will be higher than for equity release.
Best suited to those over 70 who do need anyone else to benefit form full value of property on their death.
Home Reversion - Pros and Cons
Advantages:
- Cash can be used how the borrower wishes
- No monthly payments
- Guaranteed lifetime occupancy
- On part-reversion, some equity is retained and is available to owner or beneficiaries.
- Future position is certain as no rolled-up interest.
Disadvantages:
- Planholder loses ownership of part of property
- Planholder loses right to future growth in part of the property sold
- Amount raised will not represent true value of the part of property sold
- If planholder dies soon after then it will have been very expensive
- Moving home may be difficult
- Capital or income from home reversion may affect eleigibility for state benefits.
How benefits are affected by equity release
Equity Release Regulation
Regulation of lifetime mortgages are ones that:
- Only available to those over a certain age
- Do not require full repayment of capital before end of the mortgage, although partial repayment can be required.
- Do not require regular payments o interest during the life of the mortgage, although it can be rolled up and added to debt
- Repaid only in event of death, moving into care, moving to another property or through repayment.
Rules for lifetime mortgages, set out in MCOBS 8 and 9
What is the Equity Release Council?
What are it’s principles and guidelines?
Represents participants in market, voice for sector, setting standards & safeguards to protect consumers
Code of conduct was origianlly SHIP in early 90s.
Statement of principles and specific rules for members:
- Ensure all actions promote public confidnece in equity release as a retirement solution
- Act at all times in utmost good faith
- Communicate high expectations for equity release outcomes in all dealings
- Ensure conflicts of interest managed fairly and reduced to lowest practical level
- Exercise due skill, care and diligence and uphold standards set out by professional bodies
- Act with best interests of clients and treating customers fairly in all actions
Rules and Guidance:
- All sales must be advised
- Customers aware of implications of any plan they proceed with
- Customer has considered all alternative courses of action
- Customers have right to remain in property for life and move to suitable alternative property
- Products must have no negative equity guarantee
- Customers recieve independent legal advice
Suitability of Equity Release for LTC
Not suitable for funding care for sole owner as money to pay fees only needed when they entered care and this would be at the stage the property would have to be sold. Even more so for home reversion.
Could be suitable if jointly held as joint owner could continue to live in property and use funds to pay for partners car eneeds.
Factors influencing suitability:
- Existing savings and investments
- Priority of leaving estate to beneficiaries
- May lack discipline in the use of money raised or kept on deposit and affect right to benefits
- Type of income needed and term of income needed
- Portability
- Flexibility - Can new partners be added, early repayment
Equity Release Alternatives
- Selling/Downsizing Main Residence
- Traditional Mortgage
- Unsecured Loans
- Applying for benefits / grants from government, charities or other sources
- Family Support - Financial & Non Financial
- Self-funding through savings and investments
- Working for longer or taking part time job
- Taking in a lodger
- Reducing expenditure
Implications of Equity Release
Once in place often inflexible like adding new spouse or other people to live in property.
Long Term Care rules state property is disregarded if non owning spouse or qualifying relative lives in property permanently and property will not have to be sold if owner enters permanent care so a potential of conflict of interest is there.
Total debt deducted from value of property when assessing owners capital under local authority assessment. Under lifetime mortgage, local authority can put charge on property but not on a home reversion scheme.
