Equity release - the great misconceptions

Lifetime mortgages, or Equity Release as it is better known, remains for the public who are close to, or in retirement, one of the least understood areas of property finance.

 

Yet for the over 55’s who are asset rich and cash poor, it is still a very effective way of helping realize ideas, plan inheritance properly – or in some circumstances, making ends meet as sadly trying to pay for your shopping with a nice picture of your mortgage-free property hasn’t caught on yet with retailers.

 

As a qualified Equity release consultant, I have tried below to deal with the top 5 misconceptions about equity release.

You risk losing your home

According to research by Safe Home Income Plans (SHIP), seven out of ten consumers believe that opting for equity release means you have to move out of your home. However, as long as that property remains your main residence, you can remain in it for the duration of your life.

You won't be able to leave an inheritance

Sixty seven per cent of people think that by releasing equity from their homes they will not be able to leave anything to their friends and family. Equity release does reduce your estate, as once you die or move into long-term care your house is sold and the cash is used to pay off the loan. The remainder of the money can be left to your beneficiaries.

Your children will be saddled with the debt

Four in ten people worry that their children will inherit the loan, but because you never borrow anymore than the value of your house, once it is sold the debt is cleared. No debt will ever be left to the estate.

You won't be allowed to move house

Half of the people questioned by SHIP thought that equity release tied you to your property. In fact, you can move your equity release loan to another suitable property without financial penalty.

Equity release is unsafe and unregulated

Just less than half of people worry about regulation within the equity release industry. However, as long as you choose a SHIP member company then you are protected by the Financial Services Authority.

If you want to find out more about this either for yourself, or a friend / relative over the age of 55, then please get in touch – mark@themortgagemonkey.co.uk

Bank of England must raise interest rates by year-end, OECD warns

The Telegraph reports today that the Organisation for Economic Co-operation and Development has warned that The Bank of England should raise interest rates before the end of the year or risk letting inflation run out of control.

Despite downgrading its growth forecast for the UK for the third time in six months, it said: "Normalisation of interest rates will need to start during 2011 to stave off significant increases in inflation expectations." Inflation is running at 4.5pc, more than double the Bank's 2pc target, but has so far showed little sign of becoming embedded in wage settlements.

The OECD's comments echoed another call from Andrew Sentance to begin policy tightening urgently, in his final speech as a member of the Bank's Monetary Policy Committee (MPC).He said: "Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting. That ... poses a threat to the recovery further down the track."

Mr Sentance has been voting for a half a percentage point rise in rates to 1pc since February. He will be replaced on the MPC on June 1 by Ben Broadbent, the former Goldman Sachs economist, who is expected to take a softer line on inflation, having said he broadly supports the Bank's decision to keep rates at their record low for as long as they have.

The OECD reiterated its support for the Chancellor's deficit reduction plan, saying it "strikes the right balance" but expects the deficit to account for 7.1pc of GDP in 2012 compared with the official forecast of 6.2pc for the 2012/13 financial year.

Unlike Mr Sentance, it expects inflation to drop away after 2012. Mr Sentance said energy and commodity prices "could be in a structural position of scarcity for some time yet, leading to further significant upward price movements". He warned oil prices could treble to around $300 within 20 years and urged the MPC to stop considering commodity price moves "one-offs". 

Brits are failing to secure their family's future

Britons are failing to prepare properly for the prospect of death with many failing to secure the fate of their families and money, a report has said.

According to new research the nation's post-life planning is in a shocking state with almost two thirds (61%) of people not having a will, while one in ten of those with a will have told no-one else where it is.

The survey found that a quarter of Brits have never thought about writing a will (24%) and a similar number (23%) think they are too poor to have one.

Nearly half of those aged between 55 and 64 have not made a will (46%) with over a fifth having never thought about making one (22%), while over one in eight (13%) are relying on self-written wills, the validity of which is more likely to be challenged upon death.

Children stand to be most affected by the state of Britain's wills, the report continued, as over three-quarters (77%) of parents with children under the age of five have not made a will with nearly half those who have (46%) not reviewing it in the last five years.

The research has shown that Brits just aren't planning for a future without themselves in it. People either don't have wills or haven't updated them or told people where they are. It's a great risk to run when the fate of young children and large sums of money are at stake.

This is naturally a subject that people try to avoid but it's crucial to face up to the inevitable.

Rates are going up whether we like it or not

Families should plan for interest rates to rise gradually over the next two years, the Bank of England's chief economist signalled in an interview with the Financial Times.

Spencer Dale also made it clear that he personally foresaw a difficult outlook for the economy, saying he favoured an immediate interest rate rise even though the recovery is fragile.

Mr Dale is a member of the Bank's monetary policy committee, which sets interest rates. 

"I'm not particularly happy about voting to raise interest rates and doing it for nasty reasons," he said, referring to his concerns that higher interest rates were needed to rein in inflation rather than growth, which remains weak.

 "I don't take lightly the impact this could have on some families," he added. "But I think the cost to our economy as a whole - were inflation to persist for longer and our credibility start to be eroded - would be even worse. "

Of greatest significance though is that his comments marked the first time that the Bank has provided guidance to households on interest rates, helping them decide whether to sign fixed interest rate mortgages or gamble on the Bank's monthly rate-setting meetings.

If this article has prompted you and would like to talk someone about it , feel free to get in touch with me – mark@themortgagemonkey.co.uk

Over half of the adult poplulation of the UK has no life cover

New research shows that an estimated 28 million of the UK population do not have any life insurance in place.

Research carried out on 5,148 UK Adults, shows that many are continuing to shun protection products including life insurance, critical illness cover and income protection.

Although over half of the UK population (54%) admit to reviewing their finances once or twice a year and awareness of protection is high, the reality is that the take up of these products remains exceptionally low. From those surveyed, 97% were aware of life insurance and the importance of having it, however only 44% had cover. 

Similarly, when it comes to critical illness cover the awareness remains high (86%). However the percent of respondents who have actually taken out a product is worryingly low at just 12%. The same goes for income protection insurance where the awareness is 83%, with take up at just 7%.

The research also shows that almost a quarter of the UK population (23%) say they believe they cannot afford life insurance and when it comes to critical illness cover 26% state this as their primary barrier to not taking it out.

A worrying trend, is that many material goods (e.g. internet broadband) are seen as ‘essential', whereas insuring income in case of illness is seen as a ‘luxury'. 69% of respondents said their broadband was essential to their day to day living and 55% stated their mobile phone. In contrast just 35% said ensuring their financial security if they were unable to work was essential. Just 15% of respondents said they would consider cutting back on broadband internet access, whilst a fifth said they would be prepared to cut back on critical illness and life insurance.

Many people do not like to plan for the unknown, however the importance of doing so cannot be underestimated. Research shows that the majority of people clearly understand the benefits associated with protection products such as life, critical illness and income protection, but that many still don't adequately protect themselves, their families and their homes.