Equity Release - How to buy - Buying tactics - Tips

• Buy through an adviser (IFA), or
• Go straight to an Equity Release provider, a bank or insurance company

Independent Financial Advisors (IFAs)

Most IFAs do not offer advice on Equity Release. They are unable to sell the product unless they have taken specialist exams related to Equity Release and the majority of IFAs do not specialise in Equity Release.

Banks - Building Societies - Insurance Companies - Specialist Companies

Even if you use an IFA for advice, the money part of the Equity Release deal will be done with a financial institution.

Banks are not really in the business of Equity Release, so look towards Building Societies, Insurance companies and of course specialist Equity Release firms.

Sadly many financial advisors don't have the best reputation. They know for example that many of their clients do not do their own independent research or ask the right questions and this can mean they have no problem pushing products that favour them more than their clients.

This is done by pushing product A which pays a higher commission to the agent rather than product B, even though product B would be a far better deal for the customer.

The FSA looks into Equity Release

In 2005 the UK's financial regulator, the FSA, who oversee Equity Release plans carried out a mystery shopper survey into some of the companies selling the product. The results should be noted by anyone considering Equity Release.

The report found the following -

• Lifetime mortgage advisors were accused of treating Equity Release 'as an opportunity to sell rather than as an opportunity to give advice'
• It urged firms not to rely on literature packs (normally riddled with stock photos of happy smiley faces) to explain products and instead focus on face-to-face interviews
• The FSA questions whether clients are being treated fairly if they are not informed of the high-risk nature of equity release
• Only 17 out of 39 advisors asked their clients if alternative methods had been considered to raise cash before Equity Release. This included whether the clients were entitled to further State benefits

The report finished with this quote in the summary -

'Improvements have been noted but the majority of firms assessed appear to be responding as a sales opportunity rather than an information or advice opportunity'.

The report's finding also stated that Equity Release firms were not excessively profiteering from selling these plans and their products were fairly priced.

So it's not all bad news but do use the report as a strong warning to conduct your own independent research into the different Equity Release plans.

Remember, you never find the whole story of any financial product by looking at its advantages - it is the disadvantages you should concentrate on and where you get the real answers.

Research is all the more important when you're dealing with what is likely to be your most important and valuable asset - your property.

Which Equity Scheme is right for you?

There is no single standard one size fits all answer to this question. Obviously everyone's financial and personal situations are different so what might be the right decision for you wouldn't suit somebody else.

So to get a better understanding of your needs consider the following points -

• Whether you have dependants:
  Do you have any dependants who you would like to leave any part of your property to?

If yes, then look at a Reversion plan as this will guarantee a set percentage to your dependants when you die. For example, if you sell 50% to a reversion company the remaining 50% can be left to whoever you want.

If you have no dependants then again look at reversion plans but this time sell 100% of the property. This will normally mean you receive more money than with a Lifetime mortgage

• How much you need to borrow:
  A lifetime mortgage may not provide enough money, larger sums should be available under a Reversion Plan providing you are willing to sell a considerable percentage of your home
  
  
• Age Limit:
  Reversion plans are generally not available until the youngest applicant is 65 whereas Lifetime mortgages can often be taken out at 55. But if you're married then the age of the younger person is important. You might be 75 but your wife 60 - in such a case your wife's age will be more important as she will be expected to live longer and therefore remain living in the property for a longer period (this assumes you'll be both signing a joint contract).
  
  
• Age - Equity Release is very much aged based. This is especially the case for Reversion plans, the older you are the more money you can expect.
  
  
• Medical health - The better your health the worse deal you can expect. And vice versa. Somebody who is ill and can certify any serious medical conditions will probably get offered more attractive deals.
  
  
• How much spare income you have each month - If you have considerable spare income each month and do not need to release capital for living expenses, a standard interest only mortgage might be a better deal. This is because the original loan value will not increase (interest is paid on the mortgage every month and not added to the loan as with a Lifetime mortgage). But if you don't want to add to your monthly expenditure go with a Equity Release plan.

Seek out Flexibility

No one knows what tomorrow will bring let alone a few years down the line. It is important therefore, especially when dealing with financial matters, to seek out flexibility.

Some Equity Release plans are inflexible, such as Roll Up mortgages that allow you only to take a cash lump sum when the deal is signed. But a Drawdown mortgage gives you the option to withdraw an agreed sum on signing the mortgage and then withdraw any further amounts when you wish.

This has certain advantages.

1. You won't have access to all the money at once, meaning there's no chance of people recklessly spending (cruises, new cars etc) - Sadly, many Equity Release providers promote this type of lifestyle spending
   
   
2. But more importantly, interest is only charged on money that is withdrawn. So in year 1 interest would be charged on the initial sum withdrawn, and only charged on any further withdrawals at the time.

Equity Release providers
Age Partnership Equity Release Cus4 Equity Release	Key Retirement Solutions AVIVA Equity Release

Flexibility - Early Repayment charges

Another important point is to try to seek out Equity Release deals that offer small or discounted early repayment penalties.

If you sign up for a deal today but want to cancel it in 3 years there's an early redemption fee. They can often be expensive and sometimes so expensive that you are effectively locked into the deal forever - almost a definition of the word inflexible.

Look hard at these types of charges but don't be too concerned if they're initially high but are reduced within a reasonable amount of time.

For example, you might find that a lender charges 5% (of the total value of the loan) to get out of the deal in year 1 and then this drops 1% per year so in year 6 there's either nothing to pay or a just a small admin cost.

As Equity Release is designed to be a long term product I see no problems with the above example. But to pay early redemption fees after 5 or more years - I would hesitate to sign up to one of those deals.

Interest Rates

Seek deals with low interest rates.

It's not uncommon for one provider to charge say 7% on an equity release deal and another to charge 5%. The 2% difference can often mean an extra £1,000 or more in savings per year, and even more if the loan is larger.

Research all fees and charges

A classic marketing trick with many personal finance products is to make a big song and dance about something, perhaps a competitive interest rate but then claw back profits with a variety of (often hidden) charges and fees.

At first glance this would mean that Deal A which charges an interest rate of 6% is cheaper than Deal B which charges 7%.

But when you look hard at the total cost of the deal, including every fee and charge, Deal A can work out to be more expensive, even though the interest rate is lower.

You are therefore strongly advised to put in a fair amount of effort into breaking down the charges and fees and any other costs relating to several different Equity Release deals. Then and only then can you start to have a good idea of which deals are competitive and which should be avoided.

Fees and charges are where the banks and finance firms often trap us. It is no real surprise they can do this because many customers don't fully research what they're buying and if there are any catches. Don't let this happen to you especially with something so important as an Equity Release deal.

One final point - No point knocking the finance firms for operating in this fashion, plus there's little we can do to change it.

The secret is to recognise it, expect it and then counter it by doing our own independent research. There are plenty of good deals in the personal finance world but you've got to put some work in to be able to spot them.

Shop Around

If I were going to sign up to an Equity Release deal I'd spend plenty of time shopping around.

I'd visit at least 2 or 3 separate IFAs (Independent Finance Advisors) for an initial chat as well as 2 or more banks or building societies or insurance companies that specialise in selling the product.

I would stress right from the outset that I'm just doing some initial research and Equity Release is only one of my options. I would also let the different companies know that I'm having a similar chat with other advisors and companies.

Tip - Many salesman can be pushy, determined and play all sorts of marketing/selling tricks on us. This often makes it hard for some people to say no.

I have always found that having an imaginary 'advisor', perhaps a family member or close friend, helps in these situations. Then, it's easy to say no because you tell the sales people that all potential plans and ideas have to be run past this person who of course they will never meet or get to speak to.

Equity Release providers
Age Partnership Equity Release Cus4 Equity Release	AVIVA Equity Release Key Retirement Solutions

Take Independent Legal Advice

Although you'll be advised by a specialist Equity Release adviser or company, you're still going to have to take independent legal advice.

Yes, this will cost money but as you're dealing with your most important asset it's important that you're advised by a professional who has no connections to the people selling the equity release plans.

It is interesting to note when you read about people who've had problems with equity release in the past that many of them failed to take and pay for proper independent legal advice. Although I'm a fan of saving money wherever possible if I were considering equity release I wouldn't do so without taking proper advice.

I know I've mentioned it many times before on this page but it's so important that I have to say it again -

Sadly, the less research you do, the less you understand what you're really buying and how the product works the more chance you've got in buying the wrong product at the wrong price.

So be smart, take your time, have a healthy dose of scepticism and above all before you sign anything take proper independent legal advice.

See also

• Equity Release - An introduction
• Get help on - Lifetime mortgages
• Get help on - Home reversion plans