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Equity release lifetime mortgage

brightncheerful
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Equity release lifetime mortgage

#337973

Postby brightncheerful » September 3rd, 2020, 6:51 pm

I'm guessing this is the board for this question?

Background. We (Mrs and moi) are applying for equity release lifetime mortgage, either a lump sum or draw down, to be arranged via an independent financial adviser. I am told that the mortgage provider isn't interested in the borrower's financial circumstances, only the property and valuation. But before we get that far, I am told that the IFA has a duty to the FCA to ensure that the product recommended by the IFA best suits our circumstances. Fair enough, it also avoid future disputes with us.

From comments the IFA has made, it appears that my reason for wanting the equity release is unusual. Unlike typical stories of why others have gone for equity release, for example world cruise, new car, helping the children with university fees and deposit for a house, etc, etc, we want to up our financial security with liquidity, ie money in the bank. It is not feasible for us to downsize, after months of searching and some viewing, we cannot find anything suitable within our price range; also estate agents do not make it easy to buy requiring buyers to have a buyer for their existing property before offers would be taken seriously. Having provided details of our financial circumstances, the IFA asked why would we want to borrow and pay interest from day one rather than use the money we have.

The answer, as my late father remarked, is that when spending one's own money one loses control of it and becomes dependent not only on having to borrow later on if need be but also the availability of credit. Not to mention the hoops needed to jump through to get it. The IFA suggested such a scenario unlikely as equity release is nowadays mainstream with more providers entering the market. I suspect the IFA thinks there must be something we are not telling him, but that is wrong. We are simply looking at the equity release advantage in a different way.

Beneficiaries is not an issue and unlike many of my age I have no plans to retire, also i do not have a pension, except state, so the only concern is cash-flow and maintaining our life-style, We have worked out that if we never move house there is no reason to be concerned about mounting compound interest; in any event with the repayment option we could reduce the interest. IFA queried why we should want to borrow, not use the money, only to repay. I said the option is not that we would repay but would have the choice. The no-negative equity guarantee shields us from ending up owing more than the value of the house and makes it the provider's problem.

My question is this. When an IFA is grilling someone about their financial circumstances why would/might an IFA think it better for the someone to spend existing money before or rather than borrowing?

Dod101
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Re: Equity release lifetime mortgage

#337990

Postby Dod101 » September 3rd, 2020, 9:25 pm

Has the IFA told you what his criteria has to be when judging whether you are a good and suitable case for equity release? The answer to that would surely help you convince him?

There have been so many horror stories of people who have taken equity release that the IFA is there I suppose to try to protect borrowers from themselves and my understanding is that interest rates are high for this sort of borrowing. Have you investigated other forms of long term borrowing?

It sounds as if you are simply looking for some sort of additional liquidity or 'working capital'. Is it not a rather expensive way to obtain that?

I am not helping I am afraid but maybe helping to stimulate your own thought process.

Dod

Alaric
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Re: Equity release lifetime mortgage

#338005

Postby Alaric » September 3rd, 2020, 11:43 pm

Dod101 wrote:Has the IFA told you what his criteria has to be when judging whether you are a good and suitable case for equity release?


If we step back in time perhaps thirty years, one of the many mis-selling scandals of that era was equity release. This was where house owners were persuaded to take out an equity release mortgage with the proceeds invested in an insurance bond. Needless to say, the risk that the interest on the mortgage exceeded the return on the insurance bond proved very real in practice. As a consequence the FCA and its various predecessor acronyms cracked down on this business.

In general I would think an IFA should not feel comfortable about signing someone up to borrow at what (5%?) in order to hold cash earning perhaps 1%.

Mike4
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Re: Equity release lifetime mortgage

#338009

Postby Mike4 » September 4th, 2020, 1:40 am

Alaric wrote:In general I would think an IFA should not feel comfortable about signing someone up to borrow at what (5%?) in order to hold cash earning perhaps 1%.


I've run into this sort of problem too. Borrow money to invest in property and rely on the rent to comfortably pay the interest with spades of cash to spare? Oh no! You need protecting from your stupidity. Borrow money to pish up the wall on a luxury new car and a world cruise? That'll be fine Sir. No problem at all. How much would you like? Sign here.

World's gorn mad, I tell ya....

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Re: Equity release lifetime mortgage

#338010

Postby AlumniLawn » September 4th, 2020, 4:45 am

There is a possibility that the IFA might think that you are being subjected to pressure from a third party. Being scammed.

jackdaww
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Re: Equity release lifetime mortgage

#338026

Postby jackdaww » September 4th, 2020, 8:15 am

i made several enquiries about this some time ago.

i had massive and persistent responses.

this indicate to me that there is a lot of profit/commission involved , which means bad value .

another thing came to mind - would one be put under pressure to move into a care home , so the insurer gets their cash quicker ??

:roll: :roll:

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Re: Equity release lifetime mortgage

#338045

Postby dealtn » September 4th, 2020, 10:24 am

brightncheerful wrote:... we want to up our financial security with liquidity, ie money in the bank.


Have you considered an offset mortgage?

Likely lower interest rate anyway, and by putting the drawdown into the offset savings account you will effectively be paying no interest (until you start spending any of it), and have all the liquidity you believe you need.

It won't be "forever" but will certainly be multiple years in length which gives you plenty of time to find that "downsize" property that seems so elusive at the moment.

brightncheerful
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Re: Equity release lifetime mortgage

#338074

Postby brightncheerful » September 4th, 2020, 11:51 am

Useful comments, thank you.

"Has the IFA told you what his criteria has to be when judging whether you are a good and suitable case for equity release? The answer to that would surely help you convince him?"

IFA tells me the equity release providers aren't interested in the borrower's financial circumstances: the only concern is the property and the valuation. the property concern is to do with the construction, ours is no issue. The valuation has yet to be done. i have allowed for a cautious valuation!

I don't think it's for the IFA to judge whether I am a good and suitable case for equity release. The impression i have is that the IFA wants to be satisfied i have considered other options. I have - and amongst them is not using existing capital.

Currently, for a mortgage, 30-Year Fixed Rate is 2.750% APR 2.870%
i wouldn't get a mortgage, self-employed, 'elderly'', etc.

The equity release interest rate isn't that much higher than the 2.870% (not as much as 5%) and would be fixed throughout on lump sum or at the provider's rate at the time of each draw-down. The more the overall amount the higher the interest rate on the initial drawdown. Subsequent drawdown could be a lower same or higher rate depending upon the rate at the time and interest would only be payable from the drawdown date. With interest rates currently the lowest ever. I reckon the only way in future is up.

IFA thought of borrowing at x% only to put the money in the bank at 1% is short-term thinking, I'm not planning to but i could buy shares with divi yield at 3% or more. i would think Base Bate is bound to go up long term. 0.1% is crippling the economy. As the IFA says, it wasn't that long ago when equity realise rates were 6-8%.

brightncheerful
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Re: Equity release lifetime mortgage

#338906

Postby brightncheerful » September 8th, 2020, 10:13 am

The IFA I am dealing with having insisted I provide reasons for the amount of initial drawdown - because as he said it is standard for the documentation and information providers require - on the spur of the moment I came up with some possibilites only to be told that to spend for example £10K on kitchen appliances would not be necessary because the items could be had for a few hundred pounds. The IFA helped out by suggesting some examples which resulted in my buying a new car and a few other things: the result is that the amount i wanted for initial drawdown has been been reduced by about 10%.

Part of the reason for the providers requirement is to avoid scams. Providers want to be satisfied that the borrower is not being pressured by into borrowing. The IFA having introduced the possibility of a lump sum payment, his compliance manager refused whereupon the suggestion was a non-starter.

as for buying anting that could go upon value, such as shares or property, that would be a non-starter because such are considered too risky. whereas buying something that is sure to depreciate the moment it is bought is safer!. The fact that the provider has no way of knowing whether the borrower has bought what was said is incidental. This is a box ticking exercise.


Chatting last night with another IFA, I now understand why the quizzing.

This is a regulated industry, IFAs have a duty to the FCA to ensure that advice to potential borrowers for equity release lifetime mortgages is the best advice for the person's existing circumstances. It's not about what a borrower might want but what the IFA considers the borrower needs.

So, for example, just because we have ruled out selling our home to downsize because we cannot find anything we consider suitable within our lower price range does not mean that objectively there isn't anything available within a lower price range. Strictly, the IFA i am dealing with should refuse to recommend equity release because to release capital best advice would be to sell what we have and buy something 'cheaper'. Similarly, currently we have a 4 bed house but for the two of us 2 bed would objectively be enough. In other words, the quizzing is nothing personal, but simply the means by which the IFA is able to identify and narrow the possibilities for best advice.

i am told that for IFA's equity release plans are a high risk product recommendation because the interest is compounded. hence a reluctance to stray from the duty to provide best advice lest the FCA should find fault with the advice to the extent of withdrawing the IFA's right to provide advice.

--

According to the Equity Release Council's Spring 2020 Market Report, the average life-time mortgage is circa £100,000 of which approx £60,000 is taken on initial drawn-down and the balance in £10-£11K chunks thereafter. LTV approx 35% of the property valuation. Average age of borrowers 71.


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