In this section of the website, we aim to confront the many myths that surround equity release. Over the years, equity has been subject to a vast amount of negative press, and we want to locate the source of that negative press and explain how things have changed significantly in recent years.
When and Why Did the Bad Press Begin?
The equity release market first came about in the 1960s, and aimed to help those in a position of being well off, in terms of assets (namely the home), but less well off, in terms of accessible cash. Many people found that they lived in a valuable home, with little or no mortgage, but could not afford the essential things in life, due to a low income.
By 1988, Home Income Plans were introduced, which involved buying an annuity or another form of investment bond, along with an interest-only mortgage loan. The idea was that the annuity would pay off the monthly interest, as well as providing an additional regular income. But by the 1990s, interest rates increased dramatically, house prices dropped and borrowers were left in the grim situation of negative equity. Borrowers were in a position whereby the annuity did not cover the monthly payments, and left their families with potentially huge debts after their death.
Naturally, there was an enormous public outcry, and the disaster was widely covered in the press. The public asked how was this ever allowed to happen and what would be done to prevent it?
In 1991, Safe Home Income Plans (SHIP) was formed – an equity release organisation, whereby members (lenders) must adhere to a strict code of conduct. This would pave the way that equity release would be sold in the future. The main objective of SHIP was to make equity release plans more transparent, and to increase consumer confidence in the product.
SHIP ensured that homeowners’ beneficiaries would never find themselves in the position of negative equity.
SAMs Caused Yet More Public Anger
However, the mid-90s saw yet another blow to the industry. Share Appreciation Mortgages (SAMs) were extremely popular, and allowed borrowers to release equity from their homes with an interest free loan. The condition was that any appreciation on the value of the home would be divided between the lender and the homeowner’s beneficiaries. Typically, the split was 3 to 1, in favour of the lender.
Lenders predicted that house prices would increase by around 4.5% each year, when in fact the level of growth was 11.5%. This meant that policyholders would owe an amount that was totally disproportionate to the initial loan amount. Again, equity release was at the epicentre of a torrent of public anger and of course, negative press coverage.
Equity Release Today
Equity release today is far removed from the products that were sold throughout the 80s and 90s, due to increased transparency, tighter regulations, improved protection for the customer and more choice available in the type of equity policy that you can enter.
SHIP has now been replaced with The Equity Release Council, which shares many of the same objectives as SHIP – it aims to encourage growth within the equity release industry, through improving consumer confidence in equity release products and offering customers a high level of protection.
Members of the Equity Release Council agree to follow a code of conduct, which was brought in with the view to ensure customer safety.
Two new guidelines that equity release providers must adhere to are:
- Provided the policyholder keeps to the agreement terms, they will never be turned out of their home.
- Provided the policyholder keeps to the agreement terms, their children will not end up in a situation of negative equity.
Why Is There Still Negative Press Today?
Unfortunately, stories of equity release policies that were sold many years ago still arise in the press today. The wrongdoings of the major lenders in the 80s and 90s have somewhat tarnished the industry, which is one of the reasons why The Equity Release Council was formed.
So, In Response to Some of the Urban Myths:
Your children be left with a huge amount of debt
(According to The Equity Release Council, 43% of consumers believe this to be true)
– This is untrue. At 55+ we only advise and arrange equity release policies that come with a negative equity guarantee. You will never owe more than the initial loan amount.
You won’t be able to leave an inheritance to your children
(According to The Equity Release Council, 67% of consumers believe this to be true)
– When you die or move into long-term care, your house will be sold and the proceeds will pay off the loan amount, plus any interest. Any amount left over will go to your beneficiaries
Equity release is unsafe and unregulated
(According to The Equity Release Council, 47% of consumers believe this to be true)
– The Equity Release Council ensures that all members adhere to strict regulations and guidelines, in the way that equity release is sold and in the way that policies are formatted.
The major lenders no longer offer equity release
– This is incorrect. A few institutional investors recently withdrew from equity release but only because there have been extraordinary returns on capital temporarily available in corporate bonds. This position is most unlikely to last. Property has always found lenders and investors; there are still many in equity release and likely to be more in the long term.
You risk losing your home
(According to The Equity Release Council, 69% of consumers believe this to be true)
– Provided that your home remains as your main residence, you can remain in your home for the rest of your life.
Equity release is aimed at people on a low income
– People with all levels of income make use of equity release and use the extra cash for all sorts of things. Whereas some people use the cash to make ends meet, others use it to enjoy the luxuries of life.
You won’t be able to move home
(According to The Equity Release Council, 52% of consumers believe this to be true)
– Equity Release Council members must provide the option for borrowers to move their plan to another suitable property, without incurring a financial penalty.
Equity release is a financial product that is designed to allow people to get the most out of their retirement. As long as you fully understand the implications and have discussed them with your family, equity release is a safe and secure way to gain access to extra cash during your retirement.
For discuss your options in greater detail, call 55 Plus today on 01892 458780 or leave your details on the contact form at the top of the page.
(Source – http://www.equityreleasecouncil.com)