Predictions of doom and gloom for pensioners are rarely out of the headlines these days, with worries about the failing health service and Council Tax bills running wild exacerbating concerns about lower interest rates eating into savings.
But all is not lost for many of the nation’s four and a half million pensioners who own their own homes as these factors ‘ as well as Inheritance Tax (IHT) liability ‘ have meant equity release products have increased in popularity.
Such schemes have now started to become a viable alternative to moving away from friends, and perhaps family, into smaller or sheltered accommodation. Not only is this an opportunity for pensioners to provide for themselves in retirement, but it can also be a valuable tool for mortgage intermediaries wanting to tap into a new market.
For those looking to break into the market, the main stumbling block is that clients wish to leave an inheritance to their children, which causes many of them to reject the idea of equity release. In reality, children are much better off than they ever were, and most would prefer their parents to release cash, reducing their money worries or improving their standard of living.
Another important detail to emphasise is equity release can be achieved either by selling all or part of the property, or mortgaging it. However, when discussing the specifics it will be necessary to work out what the client needs in either case their tenure is secure.
The two most common types of equity release plans available at the moment are the home reversion and the roll-up reversion.
A home reversion plan involves selling all, or a part, of a property in return for a cash lump sum (or regular income) and a rent-free lifetime tenancy in the property. The title deeds are transferred into the name of the reversionary investor; however the vendors remain in their home for the rest of their lives without paying any rent. They enjoy the same security of tenure as if they continued to own the property but they may also move to an alternative home of their choice should the need arise.
If they originally conclude a partial sale then, when a new property is acquired (in the same joint names), they will benefit from their share of the difference in price. On the death of the surviving partner, the property ‘ whether the original or a replacement ‘ is sold and the vendors’ estate receives their share of the sale proceeds.
With a home reversion the vendors remain responsible for Council Tax, insurance and the repair and maintenance of the property during their tenure.
Roll-up mortgages, by contrast, allow homeowners to raise a mortgage against the value of their property, but no interest is paid during their lifetime. Instead, the interest is rolled up and repaid, along with the capital, from the proceeds of the property’s sale on the death of the surviving spouse. The title deeds remain in their name with a charge registered against the property.
The main selling point of both schemes is that by selling all, or a part, of a property (or by taking out a mortgage) the vendors lower the value of their estate and reduce their potential IHT liability.
A key point to note is that costs vary tremendously from one provider to another. Charges include the application fee, the valuation fee, the arrangement fee, legal fees and charges. However, some costs will vary by applicant and the cheapest product for one client will not necessarily be best for the next one.
However, to sell effectively the benefits of equity release need to be understood. Homeowners are using the schemes for a variety of reasons such as: increasing their savings to produce a better income, taking holidays, making improvements to their home, helping children and grandchildren, or as part of an IHT plan. Some vendors have even used the money to buy other properties on a buy-to-let basis in order to generate an income.
In fact, unlike pensions, where an annuity must be bought by age 75, equity release funds can be used for any purpose at any time. The cash raised may be used for whatever use they wish.
Many brokers will have extensive databases of elderly clients who wish to release a cash sum but, because of income constraints, are unable to afford a normal mortgage. Brokers may also find the volume of mortgages they are arranging diminishes as the heat runs out of the residential market; equity release plans could take over as a major source of income.
Given that many pensioners are facing spiralling long-term care fees, poor annuity rates and increasing long-evity, equity release represents a huge untapped market for intermediaries.
Once the product has been ‘sold’ to the client, their needs identified and the best provider found, an application can be submitted.
It is important to note that with both reversion and roll-up plans it is essential the customer uses a solicitor of their choice; a solicitor is needed as either a charge will be placed on the property, or a legal conveyance will occur. The solicitor acting for them will be asked to sign a certificate stating they have fully explained the arrangement to their client. With a roll-up scheme they will also confirm the amount of interest rolled up could eat up all the equity in the property, or with a reversion there could be a substantial loss to their estate if the vendors die early.
Many mortgage providers and insurance companies will only deal with cases that meet fixed criteria. Anything that stands out as out of the ordinary such as properties with more than two occupants, a short lease, non-standard construction or ownership by vendors and a third party will need to go through a specialist provider.
The amount of money paid or advanced will depend on the vendors’ ages and their property’s value. It will therefore be necessary for the property to be surveyed and valued. Most providers will want to ensure that the property is in reasonable condition at, or soon after completion. A retention from the sums paid may be made to cover the cost of external decoration or electrical rewiring for example.
Once, the scheme has been placed and approved most providers will then ‘take up the running’ and only involve the intermediary if there is a particular problem to be sorted out.
The most difficult part of the sale is, therefore, allaying fears and explaining the benefits, but with no end in sight to the predictions of doom and gloom in old age, equity release should increasingly be seen as an opportunity for both pensioners and intermediaries.
Mark King is managing director at Crown Equity Release
case study 1
Mr and Mrs Smith, aged 74 and 72 respectively, live in a property worth £175,000 and wish to raise £50,000. They want to update their car and invest the balance to improve their income.
A sale based on the open market value of their property would realise £73,500 on our life plan as the maximum sum available to them at their age is 42% of £175,000; if they were older, the maximum sum would increase as their life expectancy reduces. They do not receive the full open market value, as they will not be paying any rent for the entire duration of their stay in the property. On average a woman aged 72 will currently live for another 13 years, while a man aged 74 has an expectancy of a further nine and a half years.
As their requirement is for £50,000 a sale of a 70% interest in their property would realise £51,450. On the death of the surviving partner their estate will receive 30% of the net sales proceed of the property.
There is no penalty made if a move is required to an alternative home, indeed if they do they will be able to release a further cash sum of 30% of the difference between the sale proceeds and the cost of the replacement.
Source: Crown Equity Release