As the equity release market grows, and options are expanded, there is no doubt that equity release brokers will become more and more important.
Even if the market for equity release was relatively small, without an understanding of how the system works, it would be difficult (if not impossible) for homeowners to go it alone.
How could they be sure they had arranged the best deal for them? Were there any alternatives? What is the long-term cost of equity release schemes?
We will now take a look at some of the different types of equity release and the role of equity release brokers now and in the future.
Different Types of Equity Release
If you look at the broader equity release market, there are three different types of equity release, although not all of them are readily available to older homeowners.
The three types include:-
- Remortgage to release equity
- Lifetime mortgages
- Home reversion schemes
On the surface, these look relatively straightforward, but when you dig a little deeper, there are different factors to take into consideration, and it can become very confusing.
We will take a quick look at the remortgage to release equity option and then move on to the main subjects of this article; lifetime mortgages/home reversion schemes.
While there are numerous reasons why you might look to remortgage your property, one of the main ones is to release built-up equity. If you take a step back and look at the situation from a distance, if you have high-interest debt or perhaps an investment opportunity, then equity release may be worth considering.
It is easy to forget that equity in your property is not producing any income and is capital appreciation based. Therefore, the equity you have in your property today could go up, could go down or remain steady in the short, medium and long-term. We will now look at remortgage options for older homeowners.
The average older homeowner may find their financial status changing as they approach retirement and perhaps look to wind down and reduce their working hours.
This change in financial status might include:-
- Reduced income
- Debt repayment issues
- Struggles to maintain mortgage repayments
- Lack of funding to enjoy retirement
We are by no means stereotyping older homeowners, but many will likely face financial challenges going forward.
This is set against a backdrop where they may have huge equity content in their homes, and many may already have paid off their mortgages.
So what is stopping older homeowners looking at remortgages?
As we touched on above, many approaching or even in retirement may see a significant reduction in their regular income. This could be counterbalanced to a certain extent by pension income and other policies that may come into play in later years.
However, as the cost of living continues to increase this leaves less and less disposable income. Therefore, many people looking to remortgage their property in this scenario may fail the typical affordability test.
On the surface, you may be a little surprised to learn that there is a degree of age bias regarding those over 50 years of age looking to remortgage their properties.
However, looking at this from a practical point of view, it is unfortunate, but the typical remortgage option requires regular income which many will struggle to raise.
Lifetime mortgages and home reversion schemes offer a different angle, and as this industry continues to grow, increased competition will follow to the benefit of older homeowners.
As a consequence of various factors, for many older homeowners, the only real options to release equity in later years are lifetime mortgages and home reversion schemes.
Equity Release Brokers
It is easy to simplify the role of “brokers” as simply third parties placed between borrowers and lenders, but there is so much more to this role. The equity release industry is not necessarily in its infancy but compared to the traditional mortgage market; it is still relatively small.
When you set this against a background of an ageing population in the UK, with Scotland the worst hit amongst the UK regions, equity release schemes will become even more important going forward.
This has created huge potential for equity release brokers, and many experts believe it will release some of the pent-up demand and confusion which has hovered over this sector in years gone by.
Lifetime Mortgage Brokers
Of the two main equity release schemes for older homeowners, the lifetime mortgage is one which is probably more akin with a traditional mortgage.
While the key is that there are no regular monthly payments, assisting with cash flow, the interest charged on a lifetime mortgage is rolled up and paid off together with the mortgage capital when the property is sold.
Interestingly, the interest rate on what is effective “equity release mortgages” continues to fall as competition rises. As it stands, at the end of 2019, the average interest rate on an equity release mortgage was 4.91%.
While this is still a relative premium to “traditional mortgages” there are different factors to take into consideration with lifetime mortgages.
The criteria relating to lifetime mortgages are as follows:-
- Minimum age between 50 and 60 (dependent upon lender)
- The property must be mortgage-free
- Minimum borrowings £15,000
- Minimum property value £80,000
There are other criteria which will determine whether a lifetime mortgage application will be successful, which revolve around the type of property and condition of the property.
Some lifetime mortgage companies will also focus on particular areas of the country in the knowledge that the sales market is relatively liquid, and there are prospects for long-term capital appreciation.
This regional bias is likely to be diluted going forward as competition increases, and lifetime mortgage companies look to extend their reach.
Home Reversion Plan Brokers
Between the two equity release options for older homeowners, it is the home reversion sector which has attracted more than its fair share of controversy.
This is something which mortgage brokers have had to manage by re-educating potential customers about the regulatory changes and greater consumer protection. It is fair to say that the message is finally getting through, but those who choose a home reversion scheme will need to be fully aware of the mechanics.
This type of scheme effectively sees a homeowner selling a percentage of their property to a home reversion lender. As you will see below, there are similar restrictions/criteria to lifetime mortgages, but there is one major difference.
If for example you had a property worth £100,000 and are looking sell a 40% stake than you would expect, all things being equal, to receive £40,000. Unfortunately, home reversion schemes deal on a discounted market rate which can be anywhere between 20% and 50%.
As a consequence, in the above example, you may receive anything between £8,000 and £20,000 for a share in your property which is worth, at market value, £40,000.
The criteria for home reversion schemes:-
- Minimum age between 55 and 65 (although this can vary)
- Minimum property value £80,000
- Minimum borrowings £10,000
As we mentioned above, the location and the condition of the property will also impact the ability to secure funding.
Again, there will be a focus on the right type of property in the right area of the country where the market would be able to facilitate a relatively quick sale.
Know Your Client Regulations
The equity release industry is regulated by the Financial Conduct Authority with one of the central elements of these regulations is the requirement to “know your client”. As an equity release broker, it is impossible to give your client the most appropriate advice without knowing their wider financial status.
Some factors to take into consideration include:-
- Underlying medical conditions
- Outstanding debts
- Future financial obligations
- Current income
- Future income
For many older homeowners, a lifetime mortgage/home reversion scheme may be the most appropriate and in some cases the only alternative, but it is vital that equity release brokers have a broader picture of the client’s underlying situation.
We also see the subject of inheritance brought up time and time again, with many homeowners looking to leave their home/assets to their children. This will have an impact on the level of lifetime mortgage debt or the percentage of their property sold to a home reversion company.
Thankfully, there are ways and means of writing minimum equity levels into equity release contracts. These will dictate the level of funding available, but they will also ensure that a minimum level of equity is maintained within the property to be passed on after death.
Unfortunately, unless your equity release broker asks the question, or you readily give the information, raising capital against a home can impact a homeowner’s plans to leave an inheritance further down the line.
Benefits of Using a Mortgage Broker
Now we arrive at the main element of this article, the benefits of using equity release broker as opposed to going it alone or speaking to a general financial adviser.
The first thing to remember is that equity release schemes of this nature are a specialist form of finance. As a consequence, you should only be working with equity release/mortgage brokers with the relevant degree of experience and expertise.
When it comes to fees, the best way to look at it is that you are not only paying on results you are paying for the best advice from advisers who have their finger on the pulse of the market.
There are two different types of equity release brokers known as independent brokers and tied brokers. The names probably give away the differential, but it is worth reminding ourselves of what each type of mortgage broker has to offer.
Independent Mortgage Brokers
At this moment in time, there are in excess of 300 independent operators in the UK lending market with a generally up trend in numbers. In reality, a relatively small fraction of these lenders will specialise in equity release (at the moment).
However, an independent equity release broker is not tied to any one or small group of equity lenders and is, therefore, able to carry out a full sweep of the market to find the best deal for your situation. Many people fall into the trap of automatically assuming that independent mortgage brokers will be more competitive compared to their tied counterparts, in all transactions.
Yes, they have a wider area over which to throw their net, but that does not necessarily mean they will be the most competitive party every time.
Tied Mortgage Brokers
On the flip side of the coin, the fact that tied equity release brokers are tied to a relatively tight number of lenders can be misleading. Yes, they are not able to throw their net across the whole market, but they will have very strong relationships with the parties with whom they deal.
As a consequence, it is not inconceivable that where they have specialist contacts, such as equity release lenders, tied equity release brokers could negotiate fantastic deals. The key here is access to specialist lenders focusing on equity release as opposed to the more general mortgage lenders. A
As we touched on above, the UK population is ageing, and our working lives are extending. Therefore the demand for equity release is set to grow significantly in the short, medium and longer-term.
Equity Release Broker Commissions
In many ways, the commission structure used by historic mortgage brokers attracted unhelpful attention but in many cases valid criticism. Many brokers found themselves in a difficult situation where they were faced with a conflict-of-interest in scenarios which should have been more transparent.
The FCA has introduced various regulations in recent years, one of which involves greater transparency with regards to income streams and relations with individual/groups of lenders.
The basic equity release broker commission options are as follows:-
- The commission received from the lender
- Commission paid by the borrower
- A mix of the two
As long as potential borrowers are fully aware of the commission structure for each individual equity broker they approach, then they can make an informed decision.
Recently we have seen a trend towards borrowers more inclined to pay commission direct to equity release brokers on successful fundraisings.
In many ways, this ensures that borrowers have a degree of control and avoids any potential conflicts of interest between the equity release broker and lending parties.
Regulating Equity Release Brokers
As we touched on above, the FCA continues to introduce new regulations and guidelines regarding the role of equity release brokers/lenders.
The idea is simple; going forward, these parties will be as transparent as possible so that borrowers are fully aware of the structure and relationship between brokers and lenders.
Some of the important factors going forward include:-
- Transparency before any agreements are signed
- The vital requirement to know your client
- The requirement for personalised funding structures
- Ensuring borrowers are fully aware of individual plan details
- Explaining the advantages and disadvantages of different options
- In-depth knowledge of the marketplace
- An ability to consider and potentially offer alternative funding solutions
As with any financial adviser, equity release brokers will live and die as a consequence of the standard of their advice. The position and role of individual tied equity release brokers is often strengthened as a consequence of their in-depth knowledge.
This can attract significant enquiry numbers and allow them to funnel constant funding applications to their relatively small lender base. As a consequence, because of the often high volume of funding enquiries, this should allow tied brokers to shave headline interest rates and negotiate improved terms and conditions.
Whole Market Quotes
As the term suggests, a whole market quote is one which takes in the whole market with no restrictions. Obviously, this relates to independent equity release brokers as opposed to their tied counterparts.
While the number of lenders is a little more manageable, compared to traditional mortgages, it is imperative that a broker approaches specialists in equity release as opposed to general mortgage lenders. In many ways, this allows tied equity release brokers to compete on a relatively level playing field with their independent counterparts.
Assuming, the tied broker you are working with is not only a specialist in equity release but also has access to specialist equity release lenders.
One advantage that independent equity release brokers have over their tied counterparts is the ability to contact new entrants to the market. There is a general consensus that areas of the equity release market, at least lifetime mortgages and home revision schemes, are still in their relative infancy compared to their long-term potential.
The situation with tied brokers and new entrants to the market is more complicated. It may be the case that a tied equity release broker would have to terminate relations with their previous lending partners in order to work with new entrants to the lending market.
This is where it gets complicated!
As we touched on above when looking at equity in your home in isolation and then comparing and contrasting the benefits of lifetime mortgages and home reversion schemes, one of these particular routes may seem sensible.
It is only when you begin to take in the wider financial consequences and perhaps high-interest debt with credit cards, personal loans, overdrafts, etc. that other opportunities may emerge. While equity release brokers will obviously be focused on equity release plans, they should also be able to address the wider picture using their “know your client” data.
In reality, there are limited opportunities for those over 50 looking to release equity in their property. That is not to say that a form of traditional remortgage is not out of the question, but the terms may be different from the norm.
In many ways, this reflects the need for equity release brokers to educate their customers regarding different opportunities and different ways to look at their overall financial picture.
Get the Best Deal
The beauty of the financial sector today is the fact that the majority of participants, advisers and lenders, have a strong online presence. It is, therefore, possible to sit down in the comfort of your own home and research different options/plans at your convenience.
The majority of online equity release plans will probably focus on “vanilla” scenarios which are where the services of a well-informed, well-connected equity release broker come to the fore.
In reality, there are very few scenarios where there is a one size fits all solution for equity release. Some borrowers may look at a lump sum payment; some may require regular income while others may even consider discretionary repayments if their finances improve in the future.
There are many different factors which will dictate the most appropriate route, although, at the end of the day, it is down to your broker to negotiate the best deal for your scenario.
Growing Demand for Equity Release Plans
As we touched on above, not only have we seen a natural increase in demand for equity release plans in recent years, but there is a changing demographic in the UK.
As a population, we are ageing, formal retirement dates have been removed, and in general, people are working beyond their traditional retirement date. This may be on a full-time or part-time basis, and then we have the ever-increasing cost of living.
In later life, there tends to be a general downturn in regular income which is where equity release plans come into play.
It would be fair to describe the current equity release market and the prospects for the future, as a perfect storm. The ever-increasing cost of living, people, working into later years and advances in medicine have improved life expectancy.
The equity release market you see today, especially on the advisory front, is very different to that of yesteryear. The historic stigma is fading, the relationship between equity release brokers and their clients is more transparent, and as a consequence, there is greater trust.
As more lenders enter the market, this will increase competition, reducing profit margins, and we will probably see the creation of new variations on standard equity release plans.
On a separate subject, many of the regulated equity release lenders today will also offer what are termed as unregulated products. The use of these products presumes an enhanced degree of knowledge and experience.
As a consequence, regulatory protection for consumers can be reduced. If this route is more appropriate, your equity release adviser should make you aware of the different regulatory scenario.
This is not an area for the masses, but perhaps there may be products to consider for those in more unusual financial scenarios.
The ongoing increase in demand for equity release plans has prompted significant growth in the number of equity release brokers. In years gone by the regulatory coverage was not as robust as it could have been, which led to criticism and a difficult relationship with potential borrowers.
The situation we have today is very different, the FCA has, and continues to, introduced an array of new regulations to improve transparency and protection.
There is now a more structured regulatory framework which sets the scene perfectly for the expected growth in not only equity lenders but also natural demand for equity release plans.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.