PERCY SAYS… Equity release scheme also referred to as home income plan is believed to offer a practical solution to the homeowners who are property rich and cash poor. It enables the homeowners to unlock part of the wealth that they hold in mortar and bricks for personal spending.
Majority of the home equity schemes entail borrowing against property and repaying the capital and accumulated interest upon the death of the borrower or when the borrower shifts to institutional accommodation. Since the early nineties, when the interest rates increased significantly and the share price and house prices dropped, most lenders have come up with a voluntary code of practice that aims at reducing such risks. The code of practice for safe home income plans aims at reducing the inherent risks in equity release schemes. Recently, the Financial Services Authority introduced income plans that operate within the scope of its regulations with an aim of protecting customers and driving out bad advice.
Tips to guide you when considering equity release schemes
Beware of the compound interest as it can be a harsh taskmaster
Simple equity release schemes interest rates tend to fair around 7pc to double the conventional home loan going rates. This means that the loan size taken by the borrower will double within ten years. The equity lenders argue that they ought to charge high interests since they are not aware of the time that they will be repaid. This makes the equity release schemes expensive and a problem to most homeowners.
Avoid taking unnecessary risks
Most equity release lenders subscribe to the Safe Home Income Plans code of practice. These among other essential safeguards, guarantee the equity release borrowers that they can live in their homes for as long as they want. Therefore, it does not hold water choosing a lender without such reassurance.
Seek independent professional advice
Considering the amount of money that is involved in the equity release schemes and the high chances of problems arising, it is advisable to seek the services of an independent professional to thoroughly scrutinize your paperwork. Beware of the lenders who offer to take care of your paper work. This would only mean that they have their own agent who acts for their own benefit as opposed to that of the borrower.
Avoid signing contracts that you cannot understand
Insist on plain English explanations and ask questions where you do not understand. Also remember that gobbledegook can conceal some malicious surprises.
Refuse to be rushed and take your time
If a salesperson pressures to make a decision as quickly as possible, decline the offer instantly. Always remember the old saying about acting in a haste and repenting at leisure.
Go for portable deals
A good equity release scheme allows the borrower to move from one home to the other without imposing immediate debt repayment or penalties. Your aspirations and circumstances may change as you approach retirement therefore, it is essential to maintain a flexible home income plan that retains the flexibility of moving from one home to another.
Avoid home income plans where the debts can exceed the property value to which they are secured
The average life expectancy at the retirement age provides that a usual pensioner will live on for an extra 20 years or so. Compounding can have spectacular effects especially when the interests are allowed to accumulate over long periods. A good home income plan will include the Safe Home Income Plan schemes and a no negative equity guarantee.
Remember that you cannot spend money twice
Debts that run up against your home can only mean that there will be little or nothing left for your family to inherit. You may not need permission from your family before investing in the equity release scheme but it is always advisable to discuss your plans with the people it will affect before making any decision. On the brighter side, equity release acts an effective way of avoiding inheritance tax liabilities since they allow the home owners to spend more wealth before they die.
Beware of free advice
Most of the financial advisers tend to offer recommendations that favor them instead of you. This is because, they rely on insurance companies to earn a living. Commission bias has lead to many scandals and it’s therefore advisable to seek the services of an independent financial adviser who charge a fee for their time. There are reputable providers such as 55 Plus Equity Release who are just one click away.
Do not suffer in silence
If you are not happy with your financial service provider, make a complaint or report to the Financial Services Authority.
The equity release schemes are very beneficial if used in the right manner and can be heartbreaking if misunderstood. Ensure that you always adhere to the above tips to make the best out of the home loans plan.