As the recession continues its relentless path, I cannot help but notice the peculiarity in many financial decisions. People will buy the most unit trusts when the stock market is at the top and the fewest when it is on the floor. They will also scramble to pay off mortgages when rates are falling and credit is the cheapest that it has been in living memory.
The Bank of England reported recently that households paid off £8bn of mortgage debt in the last quarter of 2008 or 3.3% of post-tax income. Back in 2006, £13bn a quarter was being withdrawn. However, when individuals apply micro-economic principles in an uncertain macro-economic climate, it becomes increasingly important to guarantee their actions and insure against a change in circumstances which could fly in the face of an originally ‘sensible’ decision.
In times of relative stability, product guarantees and security can appear relatively low in order of importance. However, when the market changes and its future direction is unknown, guarantees come into their own, and the safety and peace of mind they are designed to offer should become a necessary additional consideration for all consumers. Luckily for equity release clients, they have many to rely on.
Perhaps the most obvious guarantees are those offered by the trade body, Safe Home Income Plans (SHIP) and providers that subscribe to its code, the most pertinent being its pledge for interest rates to remain fixed or capped for life and loans never to surpass the value of the property – a no-negative equity guarantee. As house prices fall and seem destined to fall further, existing and new clients can take heart from this guarantee, knowing that they will never owe more than the value of their home and this initial rate will never increase for the length of the loan.
A guaranteed interest rate for life provides absolute certainty in what has proved to be a very uncertain world. Retirement does not guarantee that a person’s circumstances will not change, and a fixed rate for the length of the loan removes any unnecessary worry in the latter stages of life.
Further SHIP product promises include the guarantee that clients can move home; allowing customers to transfer their loan directly to another property without incurring any financial penalty, and tenure for life. This latter guarantee assures customers that, regardless of personal circumstances, unsettled financial markets or an escalating property crash, their right to live in their own home will never be compromised.
Current equity release planning requires intermediaries to build in additional layers of certainty when advising on the most suitable plan for older homeowners and these layers take the form of product choice. At present, there are a range of equity release plans available, with differing product specifications depending upon their requirements, and it is the responsibility of IFAs to match the most suited plan to his or her client’s needs.
Does the client require a guaranteed cash facility? Does the client require a guaranteed level of redemption penalty to protect them should they wish to move their plan? Do clients want the ability to repay part or all of the interest? All these questions must be asked, and relevant calculations made, before an IFA recommends an equity release plan.
With product guarantees and IFA diligence, clients are two-thirds of the way to peace of mind when taking out equity release. The final third comes in the form of independent legal advice. As stated in the SHIP code, equity release clients must seek independent legal advice before embarking on their chosen plan. Independent legal advice, which is up-to-date on all current issues, ensures that clients understand fully the implications of releasing equity from their home. This is backed by the signing of a solicitor’s certificate containing the outcome of the plan on a client’s eventual estate.
In these turbulent times, it is good to know that the guarantees put in place by the founder members of SHIP are as relevant today as ever, and with the expertise offered by IFAs and solicitors in the field, equity release customers’ micro-economic concerns are well protected, even if the wider economy seems unsettled. n
