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How To Find The Right

Equity Release Deal At The Best Price

STEP 5: Ask these 3 fail-safe questions
Now it's time to ask your Equity Release advisor or broker 3 fail-safe questions about the individual plans you've zeroed in on. The questions are specifically designed to take the equity release apart so you can look at a breakdown of the all important figures.

Make sure you get the answers in pounds and pence and not percentages.

  1. What are the total fees relating to the deal

  2. A breakdown of the increase in loan value over the next 20 years - assume the interest rate will stay fixed

  3. What are the total closing costs every year for the next 20 years - by 'closing' I mean if you were to try to cancel the deal What are the total fees relating to the deal
Ask those questions and you'll instantly be able to see the best value deals because they're -
  • Simple to understand and answer, and
  • Can't be fudged

For example, the total upfront charges for a certain equity relapse deals are either £1,025.56 or they're not, they can't for example be 'around £1,000'. So don't let any 'expert' try to bamboozle you as you're asking for details on a simple equity release deal and not detailed questions relating to the potential financing of the 2012 London Olympics.

Do not consider any equity release plan unless you get full and proper answers to your questions.

Question 1 - Points to consider
Total fees relating to the deal means every single charge possible, and then make sure they're broken down individually. So look for -
  • Application fee
  • Any possible fee to your broker
  • Fees relating to the property, such as a valuation fee
  • Legal fees
  • And any other assorted fees

Be careful with this step because as I've mentioned before it's usually the payment of fees where so many people come unstuck. Put simply, the past behaviour of financial institutions means they cannot always be trusted not to overcharge so we must be diligent when researching the costs.

Question 2 - Points to consider
In Step 2 one of the questions was 'how much will the loan principal increase every year'. But now it's time to go into far more detail.

I would therefore advise you ask for a 20 year breakdown of how the loan will grow. When I say 20 years I mean every year, for example -

  • Original sum released : £40,000
  • Year 1: The debt is £42,800
  • Year 2: Loan is £45,796
  • Year 3: Loan is 49,001 and so on for 20 years
Important: Factor in house price inflation over 20 years
Looking at how the loan grows over time won't always give you the complete picture as house price inflation should also be considered. Probabilities after all suggest the property market will move higher in value over the years.

Of course property doesn't always increase over the short term but over multiyear periods it almost always does. Therefore looking at an ever increasing loan without considering some natural house price inflation won't give you the proper picture.

This is what I'd suggest -

  • Take the loan breakdown figures for every year and look at them against the value of your property increasing by 1%, 2%, 3%, 4% and 5% every year
  • No need to go above a 5% level of average house price inflation as that's only good news, and good news always looks after itself
  • Doing this will mean the increase of the loan value every year is taken in context with an appreciating property so giving a proper picture of the financial commitment
  • See what I mean in the tables below

Value of property is £200,000

£40,000 released

Fixed interest rate of 7%

    End of year debt
    Property value
    (1% rise)
    Net equity left in Property
    Start
    £40,000
    £200,000
    £160,000
    Year 1
    £42,800
    £202,000
    £159,200
    Year 2
    £45,796
    £204,020
    £158,224
    Year 3
    £49,002
    £206,060
    £157,058
    Year 4
    £52,432
    £208,121
    £155,689
    Year 5
    £56,102
    £210,202
    £154,100
    End of year debt
    Property value
    (3% rise)
    Net equity left in Property
    Start
    £40,000
    £200,000
    £160,000
    Year 1
    £42,800
    £206,000
    £163,200
    Year 2
    £45,796
    £212,180
    £166,384
    Year 3
    £49,002
    £218,545
    £169,543
    Year 4
    £52,432
    £225,102
    £172,670
    Year 5
    £56,102
    £231,855
    £175,753

    Important point: When it comes to making financial predictions the worst thing to do is be optimistic. So the better strategy, the more prudent one, is to take an optimistic figure and then divide it in half to get a far more realistic number. As I said above, don't worry about good news as good news always takes care of itself.

    So what's a prudent number for house price inflation over the next 20 years? I'd suggest no more than 2%.

    Question 3 - Points to consider

    I've already discussed early repayment charges in detail and why they're important, they either help with flexibility or hinder it.

    So take some time to really understand them by asking your broker to break the figures down year by year over a 20 year period.

    And as I've already indicated be very wary of any equity release deal that charges a large ERC after 5 years. If they last for more than 10 years, and some are as long as 20 years, then those equity release deals should be viewed as highly suspect.

    Plus, if you cannot understand how the ERCs work, some for example are based on a complex formula which in turn is dependent on how government bonds (Gilts) perform, then be especially wary.

    If you haven't already read our 10 secrets to good personal finance, secret number 3 is to buy simple products because if you cannot understand something the chances are you're going to buy a suspect product for your needs. Complex products are normally always the ones which stack the odds massively in favour of the seller and we buyers get stuffed up!

    For example, read the personal finance press and over time you'll see the products where consumers have the most trouble (and where the banks get fined the most for promoting them), are products like with-profit funds, guaranteed equity bonds and endowment mortgages.

    All of these are complex and very hard to understand. In fact, I'd estimate at least 80% of people who've bought them couldn't tell you how they work and common sense says that's no way to do business.

    Important - Get the answers in writing
    Most people who sell equity release (even if they work in a bank) will be on some sort of commission. Sign more deals and earn more money - it's as simple as that. The trouble is it's common for the worst value products (for the customer) to pay some of the highest commissions to the salesman.

    Unfortunately whenever high commissions are paid there's always scope for monkey business, ie a salesman might not always tell the truth, or perhaps he conceals facts to make the sale.

    Look no further than the mortgage mess in America which started to implode in 2007. There a myriad of unscrupulous and over aggressive salesmen were fuelled by bumper commissions to sign up new customers with little regard or concern as to whether the individuals were suitable for the product.

    So you must make sure that you get written answers to the 3 questions and on official company notepaper. By all means talk about the figures on the phone but say you need them in writing for your records.

    If any company refuses to send you the information then to me that speaks volumes and I would advise you cut them loose, and immediately. Think about it - you're looking to enter into a major financial deal for probably tens of thousands of pounds and one side refuses to commit simple information to paper. Common sense says that's not right.

    Remember, you choose who to do business with - not the other way around and this normally puts the consumer in the driving seat.

    Tip: The 'unseen advisor' trick

    If you're uncomfortable asking for this kind of detailed information then use the 'unseen advisor trick'.

    • Say that your brother/sister/friend who's an accountant/lawyer advises you on all financial matters and they insist that all financial information is confirmed in writing for your records
    • If the broker asks to speak to the imaginary advisor, say no as they prefer to stay in the background


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