When looking into equity release, how do you know if your advisor is offering you the best advice? A good starting point can be by asking them some questions and testing their knowledge of the industry.
I have crafted some questions below to help you see if your equity release advisor knows their stuff!
The first three questions for me are mandatory for you to ask your advisor.
1. Do you advise on all types of equity release?
There are two main types of equity release plan currently available, a home reversion plan, and a lifetime mortgage.
Over and above this, it is also favourable to understand if the advisor also offers advice on residential mortgages, Interest Only mortgages, and retirement Interest Only (RIO) mortgages. If they do, and any of these mortgages are cheaper than an equity release plan, they will let you know.
By asking this question, it should lead to more of an understanding of whether they are tied to any particular lender, or are offering advice from the broader market. The more lenders they work with, and the more plans they have available, the less you will have to shop around for the best deal!
2. What are the costs associated with an equity release plan?
There are different costs, from various parties you should be aware of when looking into taking out an equity release plan.
The lender may charge you:
- An upfront valuation fee - this will most likely be non-refundable.
- An arrangement fee - this could be added to the loan amount, but may also attract interest.
- Interest - a lifetime mortgage (the most common type of equity release) will attract interest. Unless serviced, the interest will roll-up meaning the amount of interest charged increases year on year.
- You are required to have legal advice from your solicitor for an equity release plan to be arranged.
The equity release advisor may charge you:
- An upfront fee - this will most likely be non-refundable.
- A completion fee - this will usually be for advising and arranging the finance.
We typically budget around £3,000 for all the fees associated above. It is most common that no payments are due until completion of an equity release plan (when you get your money).
3. Does the Equity Release Council safeguard me?
It is essential to understand if any equity release plan that your advisor recommends meets the Equity Release Council standards, and therefore afford you the following protections:
- For lifetime mortgages, interest rates must be fixed or, if they are variable, there must be a "cap" (upper limit) which is fixed for the life of the loan
- You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract
- You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan
- The product must have a "no negative equity guarantee". This means that when your property is sold, and agents' and solicitors' fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
Alarm bells should be ringing if your equity release advisor cannot explain these protections to you. And crucially whether any plan they recommend will be covered.
Once you have established the answers to the first three questions - hopefully, your advisor passed with flying colours - why not ask them some from the below to further test their knowledge.
1. How do you choose the right plan for me?
Your advisor should be able to clearly explain their process for selecting the right plan for you. Essentially this extends to what their proposition is, and how they are going to work for you.
It is a Financial Conduct Authority (FCA) requirement that your advisor understands your circumstances and what you are looking to achieve. This is known as "know your client". Note: The Financial Conduct Authority regulates financial advice throughout the UK.
From here, your advisor should carry out market research, and prepare their recommendation, along with the reasons why they are recommending the particular plan.
It is a best practice that their recommendation is prepared for you in a physical document, commonly referred to as a suitability report.
2. What are my alternatives to equity release?
When exploring equity release, it is essential that you consider other options that may be more suitable for you.
Your equity release adviser should discuss other options with you to ensure that an equity release plan is suitable.
I would expect your advisor to explore alternatives with you, including:
- Moving to a cheaper property
- Remortgaging or amending any current mortgage with your existing lender
- Discuss whether there could be any potential help from your family
- Explore any other assets you wish to sell or release value from
- Any government grants that may be available (if you are making health-related property adaptions)
- Entitlements to state benefits not currently claiming
- Renting out a room
- Tightening your budget
- Changing employment / returning to work if retired
- Using any pensions
3. How do you decide what initial advance, and what reserve I should have?
An initial advance relates to money that you will receive now. A reserve facility is a pre-agreed amount of money that you can access in the future directly from the lender.
It is best practice to release only enough money to cover any expenses you are expecting to have over the short term as an initial advance. Any additional funds you expect to require over the medium to long term should be placed into a reserve facility.
This is because you will only be paying interest on any money advanced; You do not pay interest on any money in a reserve facility.
Therefore you will be paying less interest, and this could save you and your estate thousands of pounds.
4. What state benefits will I lose with an equity release plan?
The only state benefits you may lose entitlement to are those that are means-tested. These benefits are for those who have low income and low levels of savings.
Pension Credit and Council Tax Credit are examples of means-tested benefits.
As money received from equity release is not classed as income, the funds will be exempt from the income element of the calculation.
The upper limit for savings is currently £16,000. Therefore any money you receive from an equity release that brings your savings above this threshold will result in you losing your entitlement.
There are lower limits where you could start to lose some entitlements.
Therefore your advisor should explore any benefits you may be entitled to, and how any equity release could affect this.
5. How much can I borrow on a RIO?
RIO stands for Retirement Interest Only mortgage. These types of mortgages require mandatory monthly interest payments are made. But instead of having a set term when the capital needs to be paid back, they instead run until the death of the last borrower, or the last borrower entering long term care.
Interest rates on a RIO may be lower than Lifetime Mortgage interest rates. Therefore a RIO may save you thousands of pounds over the lifetime of the mortgage.
As RIO's require mandatory monthly interest payments, the amount you can borrow is assessed not just on your property value, but also on your income and expenditure. It is common for the maximum the lender be willing to loan to be around 4 to 4.5 times your income, providing the loan be less than 80% of your properties value.
Any qualified equity release advisor will also be qualified to advise on RIO's. You should find out if yours knows what they are, and if they are offering them to you as part of their service.
6. What are the downsides to taking out equity release?
The main downsides to equity release include:
- The potential loss of and means-tested benefits - These include Pension Credit and Council Tax Credit
- Lowering the value of your estate - Which could mean leaving less inheritance for your beneficiaries
There may be many other downsides depending on your personal circumstances. After reviewing your circumstances, your equity release adviser should be able to explain these to you.
7. On which lenders plans do you advise?
It is a Financial Conduct Authority (FCA) requirement that your advisor provides you with details of the type of service they provide. Whether they are tied to one lender, limited to a panel of lenders, or offer whole of market advice. Note: The Financial Conduct Authority regulates financial advice throughout the UK.
Your advisor should explain their offering to you clearly.
The more lenders they work with, and the more plans they have available, the less you will have to shop around for the best deal!
8. Will I be able to have other people living with me in the future?
It may not be something you have considered, but this potentially could be a big issue for you in the future.
If you are planning on staying at home rather than going into residential care, will you require help from any family or carers? Could it be possible that they will be living with you?
While this may be something that you had not previously considered, due consideration should be essential.
9. Will the provider change the terms/interest rate in the future?
Any plan that meets Equity Release Council standards cannot have its terms changed in the future.
The interest rate must either be fixed for life or have an upper cap that it cannot exceed too.
Even if your lender ceases to trade, or sells your plan onto another party, they must honour the original contract terms.
10. What happens if I need more money in the future?
If you need any additional funds in the future you could:
- Access money from a pre-agreed reserve facility.
- Receive additional equity release advice and apply for a further advance from your existing lender.
- Receive additional equity release advice and change plan/lender to one who offers you the funds required.
Before borrowing any additional money on an equity release plan, it is essential that you re-evaluate all alternatives.
If following this guide, you have further questions regarding what equity release is and how plans work, please see our full 2020 equity release guide.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.