What’s right for one person isn’t always right for another…
Today’s article is from Jamie Cassidy, Director of Porter Brown & Co (financial services) Ltd and accredited member of the Society of Later Life Advisers (SOLLA). Jamie specialises in advising elderly clients on lump sum investments, inheritance tax planning, equity release and the funding of long term care and nursing home fees.
In this article Jamie looks at the pros and cons of equity release and at the relative merits of using equity release as a means of releasing funds in later life.
The title of this article is misleading in the sense that I am not going to recite a list of dos and don’ts on what can be a contentious subject.
Over recent years my view about equity release has changed because I have seen too many older people afraid to put on the extra bar of the electric fire because they felt they couldn’t afford it.
My own mother was a person who used to organise her diet via the oven. When she had finished heating up her food she would leave the oven door open to keep herself warm whilst eating. Sad but true.
Amongst financial advisers, equity release seems to be akin to Marmite; you either love it or you hate it, and for those who like lists or just want to find out more about the pros and cons I would direct you to the Frequently Asked Questions page on the Equity Release Council website and the equity release page on the Porter Brown website.
In simple terms, equity release offers the over 55s a means of extracting value, by way of a capital sum, from probably the most cherished asset we own: our home. Most of us will have saved for a deposit, taken out a mortgage and battled to keep up the mortgage payments so that one day we can breathe a sigh of relief and say ‘this is ours’.
Why create new debt when you’ve already paid off your house?
Having worked so hard to relieve ourselves of debt (the mortgage) it seems counter intuitive to burden ourselves with another debt, or relinquish total ownership, by taking out some form of equity release.
It is a sad fact of life that a large number of people will go into retirement with a pension income that is insufficient either to make ends meet or to maintain a standard of living to which they have become accustomed.
Even if our income in retirement is sufficient for our needs and to pay for luxuries how do we pay for those aspirations that we still have, e.g. the world cruise, visiting the grandchildren in New Zealand, etc? This is where equity release comes in.
An alternative to equity release
A common alternative to equity release is to downsize. In other words, sell up and move to a smaller property and then enjoy the extra capital that emerges. This is probably what I would do if the need arises but I (unlike my wife) do not have a strong emotional attachment to the bricks and mortar I return to each day.
It is for this reason that I would argue that equity release is an emotional decision with financial consequences, rather than a financial decision with emotional consequences.
There is no doubt that equity release is an expensive way of raising capital. One form of equity release, the Lifetime Mortgage, would currently have an interest rate of around 7% p.a., which is monumental compared with interest rates on saving deposits of less than 3% p.a.
How do you put a price on where you live in later life?
A rule of thumb tells us that a debt with an interest rate of 7% p.a. will double every 10 years. Take £50,000 now and you (or your heirs) will owe £100,000 in 10 years’ time.
It is clear that there is a price to pay for releasing equity, but that price is easily quantifiable. But can you put a price on comfort, dignity and contentment in your twilight years?
When downsizing, what isn’t quantifiable is the price of the loss of familiar surroundings, the price of the loss of neighbours and friends, the price of the loss of the environment where you raised your children and family, etc.
There is no doubt that professional advice on equity release must examine all of the financial pros and cons of the arrangement but, in my opinion at least, the emotional aspects have an equal if not higher value and should not be excluded.
Your free guide to equity release
Equity release is not for everyone but when the chips are down does it not seem sensible to take advantage of one of the most valuable assets most of us will own?!
If you’d like a free copy of Porter Brown’s highly informative and helpful guide to equity release, simply email firstname.lastname@example.org and we will be happy to send you copy.
You’ll also find more information about our services on our website.
Porter Brown & Co (financial services) Ltd, 7A Waterside Business Park, Waterside, Chesham, Bucks HP5 1PE. Registered in England & Wales No. 01559068.
Porter Brown & Co (financial services) Ltd is authorised and regulated by the Financial Conduct Authority. Registered number: 135746. The general financial planning guidance provided in this article is based on our understanding of current law and practice, which are subject to change in the future. Whilst every effort has been made to ensure the content of this article is correct, it is intended to provide you with general information only and does not attempt to give you advice on any particular investment or to recommend any particular investment to you. If you have any doubt as to whether Equity Release is suitable for you, you should contact Porter Brown (financial services) Ltd for advice.