"If equity release is the only viable option, what happens if the numbers don’t add up? What happens if the property valuation is lower than expected?"
By the time equity release clients come to us its clear they have a real need for capital. We see many concerned about paying off an interest-only mortgage because of a noticeable gap between what they have saved and the amount owing. This can be a stressful time for clients and our job is to help them make the right decision, taking a holistic view of their finances.
Clients may have a range of options, such as raiding their emergency fund, dipping into a flexi pension, cashing in their savings and investments, or even downsizing. A good later life adviser will need to explore all of these before going down the lifetime mortgage route. But, having done this, if equity release is the only viable option, what happens if the numbers don’t add up? What happens if the property valuation is lower than expected?
We’ve recently been rethinking our equity release value proposition, as we utilise new specialist over-55s product solutions, which have recently come to market. This is part of our commitment to adding more value in the later life financial advice space. Here’s a recent client case study which illustrates the problem and demonstrates how we are now addressing the issue with new thinking.
Case study 1
The client was aged 65, a non-smoker and in good health. Their current property value - £400,000; existing interest-only mortgage to repay - £168,800; currently paying monthly interest of £352 pcm; monthly income of £5,500 net (includes income from personal pension annuity, rental income and current employment). They’ll receive a company pension of £2,000 pcm in two years plus full State pension.
Equity release solution
Maximum LTV: 35.7%.
Maximum advance: £142k.
Interest on voluntary payments lifetime mortgage: 3.8% p.a.
This still left a balance to be funded of £26k.
Our approach is now to examine unsecured lending alongside the equity release loan. We can do this as recent product innovations have introduced higher lending levels up to as much as £150k and longer repayment periods – up to 20 years - backed by underwriting which understands the over-55 borrower.
In this case study we were able to top up the maximum LTV on the lifetime mortgage by the deficit of £26k for a repayment figure which was close to the amount being paid on the client’s interest-only mortgage. The unsecured loan was deemed affordable, particularly as there are no contractual interest payments on the lifetime mortgage, and the client is looking forward to more pension income in two years’ time. The client was extremely happy, as they cleared the interest-only mortgage, were able to stay in the family home and had peace of mind.
Reducing the debt to the estate
We see many clients exploring lifetime mortgages and have full and frank discussions on the roll-up effect to their estate.
This an area where we have started to modify our approach, again using unsecured borrowing. In this case study, the client had no other options than a lifetime mortgage with voluntary payments.
The client was 62, with a current property value of £600k. Their existing interest-only mortgage was £110k and they’re currently paying £229.17 pcm. Their monthly income was £3.5k net (includes income from personal pension annuity, and current employment). They’ll receive a company pension of £1,750 pcm in five years plus full State pension. Plus, they had an additional capital requirement of £110k to make home improvements and build a granny annexe. The total required was £220k.
Equity release solution
Maximum LTV: 36.94%.
Maximum advance: £221,640.
Equity release roll-up loan: £220,000; LTV 36.9%; interest rate of 4.99%.
Monthly interest rolled-up: £914.83
Total debt to estate: £674,257.
As the client was concerned about the level of debt to the estate, we offered a top-down option. Here we reduced the lifetime mortgage advance by approximately the amount that can be provided through an unsecured loan based on their current monthly interest-only mortgage monthly payment figure. The numbers looked very different after this:
The unsecured loan
Loan amount: £20,000; term: 13 years; monthly repayment: £196.22.
Reduced equity release loan by amount of unsecured loan:
£200,000; LTV: 33.33%; interest rate: 3.44%; monthly interest rolled-up: £573.33.
Total debt to estate: £435,382.
Lowering the equity release loan by £20,000 reduced the LTV and ER interest rate, which in turn made a dramatic difference to the residual debt to the estate on death. By taking a £20,000 unsecured loan the saving to the estate was a significant £235,875. This was enough to make the client feel better about taking a lifetime mortgage, particularly when shown the projected value of the property in today’s terms against the much smaller debt.
In addition to these examples, we are utilising this approach for clients unable to release sufficient equity due to downward property valuations and where property types are not acceptable to lenders. Existing equity release clients looking for additional funds for property renovations could also take this route instead of disturbing their existing arrangements.
As the later life lending sector takes on board the FCA review of last year, I strongly believe there is a place for this type of approach in the quest to deliver better outcomes for clients.