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THE BRIGHTSTAR GUIDE TO LATER LIFE LENDING

The fourth edition in our series of 'Guides To' - October 2018

Demographics suggest that later life lending is going to become a significant driver of growth in your business, and if you are not offering solutions for your clients, you are not only missing an opportunity but also failing them. There remain, however, a number of myths surrounding equity release products and this guide will help you to bust those myths with clear information on the ways you can start to use equity release to meet the funding requirements of your clients.

 

The potential demand for equity release is clear. The OECD says that there will be more than 35 people over 65 for every 100 of working age by 2025 and the ONS says that the total pension liability of the UK is estimated to be £7.6 trillion, which is double the level of GDP. At the same time, Savills has said that UK housing wealth is now worth more than £7.14 trillion. Equity release could therefore provide a solution for millions of older homeowners who want to boost their income and enhance their lifestyle.

 

What is equity release?
Equity release is designed for people over 55 who want to raise tax-free funds to enhance their retirement by using the equity in their home, while continuing to live in it.

 

The different types of equity release:

There are two main types of equity release products – lifetime mortgages and home reversion plans. At Brightstar, we have chosen only to offer lifetime mortgages.

 

Lifetime mortgages
These are the most popular form of equity release as the borrower retains ownership of the property. Unlike a traditional mortgage, lending is based on the market value of the property and age and health status of the borrower. This means that the client’s income and credit history is not taken into account.

Lifetime mortgages allow the borrower to release funds for any purpose and they are not required to make any repayments. The funds can be released as a lump sum or in smaller payments as a drawdown facility to be used as and when they’re required.

 

The interest is typically ‘rolled up’ and added to the amount owed each month. A lifetime mortgage is usually repaid from the sale of the client’s home when they or the remaining applicant dies or enters long-term care.

There is a ‘no negative equity’ guarantee, so your client or their estate beneficiaries will never be liable to pay anything over the value of their home. The client can opt to include ‘inheritance protection’ with some plans that will guarantee an agreed percentage of their home’s value will be passed down, irrelevant of how much interest is owed.

Lifetime mortgage products are improving all the time and borrowers now have the option to make some payments towards a loan to reduce their overall cost of interest.

 

Home reversion plans
Home reversion plans are set up so that the client sells part or all of their property at less than its market value to release a tax-free lump sum, a regular income or both. The client is able to remain in their home, as a lifetime tenant, on a rent-free basis.

The client will usually only receive 20% –60% of the value of the property, depending on the market value of their home, the client’s age and status of their health.

Home reversion plans are high risk products. They could have a major impact for tax, benefits, inheritance and long-term financial planning, so this is not an area in which Brightstar and Sentry Lifetime offer advice.

 

Common uses for equity release
There are many reasons why your clients may want to release equity from their home. We have recently worked with clients on lifetime mortgages to clear a bridging loan, fund home improvements, plan for inheritance tax and provide a deposit for high yielding buy-to-let properties that were able to provide an income for retirement. Some common reasons for choosing equity release include:

  • Helping family members, such as contributing to education fees or getting them onto the property ladder
  • Home improvements to enhance a home or carry out adaptions that make it possible for a client to stay in their home in the longer term
  • Holidays and trips to help enhance a client’s retirement
  • Lifestyle improvements like a new car, a hobby or to provide care in the home
  • Provide additional income to supplement a pension
  • Pay off outstanding debts to relieve the pressure of monthly outgoings

 

How is equity release regulated?
All brokers and providers of lifetime mortgages and home reversion schemes are regulated by, and must be registered with, the FCA.

 

What qualifications are required for advising on equity release?

Equity release is a specialist area, with its own permissions and there are two main equity release qualifications:

  • CeRER (Certificate in Regulated Equity Release), which is awarded by the Institute of Financial Services (IFS)
  • CER (Certificate in Equity Release), which is awarded by the Chartered Insurance Institute (CII)

 

How can you offer equity release to you clients?
It is possible to offer equity release to your clients even if you don’t have the correct qualifications and permissions. We have launched a Later Life Lending service for brokers through a partnership with Sentry Lifetime. It means that you can offer a range of equity release solutions to your clients even if you do not hold the relevant qualifications. Just refer the client and you get a share of the proc fee on completion.

It is important to partner with an expert and Sentry Lifetime has a really good team of qualified and experienced equity release professionals who share our dedication to high standards and integrity.

They take extra special care when discussing lifetime mortgage products with clients and often involve other family members in the process to ensure everyone is comfortable with the products and options. They can also discuss the implications on equity release and inheritance with the client in detail and, in some scenarios, put in place inheritance protections.

The process is simple, for you and your client. You can refer a client to Brightstar online or by getting in touch on the phone or email. Sentry Lifetime will then contact your client upon your approval and discuss their requirements in more detail.

Sentry Lifetime will manage the advice process, including home visits if required by the client and logistically suitable. They will even offer to include family members in the process to answer any questions they may have.

You will then receive a share of the proc fee on completion and have the peace of mind knowing that our usual no cross-selling guarantee applies to all Sentry Lifetime referrals

 

Busting myths about equity release
In the late 1980s and early 1990s equity release developed a bad reputation because of mis-selling that took place around the product. Since then, the industry has introduced a magnitude of regulation to protect consumers and launched an independent body, the Equity Release Council, dedicated to the protection of equity release plan holders and the promotion of safe equity release plans. However, a lot of misunderstanding remains and you may encounter clients who believe one of the many myths about equity release. Here are some of those myths and the truth behind them:

 

Myth: I won’t own my home anymore, so I might lose it
Truth: With a lifetime mortgage, people remain the owner of their home

 

Myth: I don’t want another mortgage now, I can’t afford the repayments
Truth: With a lifetime mortgage, no repayments are normally required until the borrower dies or goes into long-term care

 

Myth: I can’t access equity release as I have a blemished credit record.
Truth: Lending is based on the market value of the property, age and health status of the borrower. Income and credit history are not considered

 

Myth: I don’t want my children inheriting a debt
Truth: The ‘no negative equity guarantee’ means that the debt will never be more than the equity in the property

 

Myth: I won’t be able to leave anything to my children or grandchildren
Truth: It is always a good idea for someone considering equity release to discuss their plans with their close family. There is now the option to take up an equity release product with built-in equity protection that provides an ‘inheritance guarantee’

 

Myth: I might not want to stay here forever. Wouldn’t equity release tie me down to this home?
Truth: There are now portable equity release products are available, which could enable a customer to move home and move their product