Equity Release: Dispelling the Myths
Equity Release is a financial product available to all home owners over the age of 55 with properties worth more than £60,000. It provides a simple line of borrowing for people who are asset rich, but cash poor. Like a lot of products in the financial sector, equity release has seen its ups and downs over the last few decades and, due to the bad press attributed to the unregulated products sold during the 80’s and early 90’s, many approach equity release with caution.
Here is a potted history of equity release that will help to dispel those myths and explain the reasons behind the bad press:
1960’s: Equity Release Begins
The first equity release plan was introduced in 1965
1970’s: First Annuity Plan
The first home income product was launched in 1972 by Allied Dunbar. This plan comprised a fixed rate interest only mortgage that was used to purchase an annuity, providing a fixed income for life. The mortgage interest was fixed and deducted from the annuity payment, therefore customers did not need to worry about changes to interest rates or falling behind with interest payments. These plans, however, were no longer available from 1991 due to changes made in the Budget regarding the taxation of annuity business.
1980’s & 1990’s: The Troubled Years
A new style equity release plan was introduced in 1988 (also known as “home income” plans). These plans, similar to those from Allied Dunbar in the 1970’s, were based upon buying an annuity or an investment bond alongside an interest only mortgage, usually at a variable uncapped interest rate. The monthly annuity payout was set up to pay off the monthly interest of the mortgage loan as well as providing an additional income. The problems with this plan arose when, in the early 1990’s, the rapidly rising interest rates, alongside fixed annuities and falling house prices, left borrowers with negative equity on their homes and monthly arrears. Families couldn’t move house and were also left with debts that they had no way of paying off. Equity Release was deemed to be inflexible and expensive and so the bad press began….
Share Appreciation Mortgages (SAMs) dealt the equity release market another blow when they were released in the mid 90’s. SAMs allowed home owners to release equity from their home with an interest free loan and, in return, the customer would pay back a % of the future growth in property value, based upon the prediction of a 4.5% rise in property value per year. When property prices rocketed in the late 90’s and the % rise was approx 11.7% per year, SAM holders were left owing massive amounts that were completely out of proportion to their initial loan.
Consumer Protection
The growing need for consumer protection led to the formation of Safe Home Income Plans (SHIP) in 1991. These plans now represent the majority of the equity release market and ensure that all members abide by strict rules and regulations. The consumer is safe in the knowledge that they will have all the information they need when taking out an equity release plan and, most importantly, all SHIP plans come with a “no negative equity guarantee” – a customer of a SHIP equity release plan will never owe more than their home is worth and no debt will ever be left to the estate.
2000’s: Changing market and FSA Regulations
By the late 1990’s more SHIP products became available to the consumer and, as the new century began, more big name financial institutions came onto the market. Names such as Norwich Union, Aviva and Liverpool Victoria provided the consumer with a safe and easy way to release equity from their homes.
Although the equity release market doubled between 2002 and 2003 the bad image, created from the catastrophes of the poor products from the 80’s and 90’s, overshadowed the growing market. Consumers were wary of the lack of regulation. When the Government announced that lifetime mortgages would be regulated by the Financial Services Authority (FSA) from 31st Oct 2004, a cheer was heard in the equity release market! Only fully qualified financial advisers could then recommend schemes and all fees and potential costs had to be laid out to ensure the consumer has all information needed. The FSA strictly monitored the sale of all products and fined any company not seen to be selling products in line with the financial guidelines set up to protect consumers.
The equity release market now gives consumers a wide choice of different options such as lifetime mortgages, drawdown lifetime mortgages, interest only lifetime mortgages and home reversion plans. FSA regulated companies offering independent financial advice offer consumers a valuable option for their retirement by allowing them to use their biggest asset – their home.
Reports show that with our growing retired population wanting to enjoy their retirement in comfort, equity release will be as commonplace as a mortgage.
Compare all leading equity release providers
