Topic 7 - Equity release

Question 1

When trying to raise funds for LTC, it is very common to xxx to raise the relevant money. An alternative to this, is to enter a scheme that xxx

Answer 1

sell the family home
releases some or all of the equity in the home without loss of residency.

Question 2

The two main types of equity release are

Answer 2

Lifetime mortgages
Home reversion schemes

Question 3

A lifetime mortgage is where the property owner raises the funds via

Answer 3

a mortgage and continues to own their property.

Question 4

Lifetime mortgages do not have to be paid until the earlier of:

Answer 4

• Entering resi care
• Moving home
• Death

Question 5

The 3 main types of lifetime mortgage are:

Answer 5

• Interest roll-up (most commonly set up LTM)
• Interest only
• Home income plans

Question 6

Home reversion plans sell part or all of the home to a reversion company in return for xxx. The individual has a xxx on the property so can continue to live there.

Answer 6

a capital sum, an income or a combination of both
lifetime lease

Question 7

When do home reversion schemes end for joint and single life cases?

Answer 7

When owner moves into resi care or dies, or when second death or move into resi care happens

Question 8

Interest roll-up mortgages are a variation of xxx where no capital or interest is paid during the life of the borrower.

Answer 8

lifetime mortgages

Question 9

How does an interest roll-up mortgage work

Answer 9

• Interest rolls up and is paid after death of owner along with capital
• No negaitve equity guarantee usually provided as interest can get extremely expensive
• Further borrowing may be allowed if house price increased enough
• Used to generate cash sum, income via annuity, or both
• Provide income for life with no monthly paymnets, debt charged against estate
• Taking cash via ‘drawdown’ can reduce effects of interest

Question 10

How long is the term on an interest-only lifetime mortgage

Answer 10

No term

Question 11

When is an interest only lifetime mortgage repaid

Answer 11

When the borrower moves, goes into care or dies

Question 12

Interest-only mortgages good for people who are

Answer 12

too young for roll-up mortgages and can be used however.

Question 13

Interest-only lifetime mortgages

Borrower needs to be sure that they have enough money for the interest payments, and xxx interest rates could make life hard. Also must take care that increases in xxx and xxx do not disqualify someone from claiming state benefits.

Answer 13

variable
capital and interest

Question 14

Retirement interest-only mortgages

In March 2018, the FCA announced a new category of retirement interest-only mortgages. This was designed to aid people who…

Answer 14

already had an interest-only mortgage but did not have a suitable repayment strategy in place.

Question 15

Retirement interest-only mortgage is a good substitute to equity release as it xxx providing the borrower is happy to pay the xxx

Answer 15

avoids interest roll up
interest

Question 16

How does a retirement interest-only mortgage differ from other interest only mortgages

Answer 16

• Not classed as lifetime mortgage, is a mainstream mortgage
• Lenders must do affordability checks
• Repayment due only when owner moves or dies

Question 17

How do home income plans work

Answer 17

• Type of lifetime mortgage
• Providers buys annuity on behalf of client and interest taken straight from annuity payments
• Rest of the income is given to the client

Question 18

Home income plans

Borrowers who started a policy before April 1999 benefit from Mortgage Interest Relief At Source (MIRAS) on the first £xxx of the mortgage. For this reason, lenders often offered a maximum loan of £xxx.

It is generally known that these are not viable for people below age xx, though not really viable for anyone and they are xxx now.

Answer 18

£30,000
80
very rare

Question 19

How do home reversion plans work

Answer 19

Company buys a portion of the house from the owner in exchange for lump sum or income. Owner can live there until they move or die in return for an annual lease that will never be more than £12.

Question 20

What is the minimum amount of time that a home reversion plan must run for

Answer 20

at least 20 years

Question 21

What amount of cash is usually given with a home reversion scheme in relation to the total value of the property?

%

Answer 21

35-75%

Question 22

Advantages of home reversion plans

Answer 22

• The cash raised can be used as the borrower wishes.
• No monthly payments are required.
• The borrower is usually guaranteed lifetime occupancy.
• On a part-reversion scheme, some equity in the property will be retained. The equity is available to the owner or their beneficiaries.
• The future position is certain as there is no rolled-up interest. Who owns what, and how much, is set at the start of the contract.

Question 23

Disadvantages of home reversion plans:

Answer 23

• The planholder loses ownership of the property or part of it.
• The planholder loses the right to any future growth in the part of the property sold.
• The amount raised will not represent the true value of the part of the property sold.
• If the planholder dies soon after taking out the arrangement, the deal will have been very expensive.
• Moving home may prove difficult.
• Increases in capital or income resulting from a home reversion plan may affect the borrower’s rights to state benefits.

Question 24

Benefits may be affected if you arrange an equity release on your home. This will typically affect the means tested benefit as you will now have a large capital sum or a new income from the equity release arrangement, which would affect the means tested figures. Means tested benefits include:

Answer 24

• Pension credit
• Jobseekers allowance
• Income support
• Income related employment and support allowance
• Universal credit
• Council tax support

Question 25

Example of some of the benefits that would not be affected by equity release (non-means tested):

Answer 25

* Carer’s allowance * Personal independence payment * State pension

Question 26

The regulatory definition of lifetime mortgages covers mortgages that:

Answer 26

* Are only available to borrowers over a certain age * Do not require full repayment of capital before the end of the mortgage, although partial repayment can be required * Do not require regular payments of interest during the life of the mortgage, although interest can be rolled up and added to the debt to be repaid at the end of the mortgage * Are repaid only in the event of the borrower’s death, a move into residential care or sheltered accommodation, the borrower moving to another property or the borrower choosing to repay the loan

Question 27

Lifetime mortgages were brought under regulation by the xxx (now FCA) on xxx. These mortgages are classed as ‘xxx’ by the regulator, so there are very stringent rules. Rules set out in the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB), Chapters x and x. Chapter x covers advising and selling standards and Chapter x product disclosure.

Answer 27

FSA 31st October 2004 higher risk 8 and 9

Question 28

Regulatory status of a home reversion provider is important – FCA have criteria to determine whether a home reversion plan is regulated and what activities are regulated. Where a product is regulated, it follows FCA Conduct of Business rules. Regulation provides the customer with protection in the following forms:

Answer 28

* Standards of behaviour from firms and advisers * A structured complaints procedure * The services of the Financial Ombudsman Service * Potential redress in the event of unsuitable advice * The principle that firms will ensure fair treatment of customers * The availability of the Financial Services Compensation Scheme

Question 29

The equity release council (ERC) represents

Answer 29

all participants in the equity release market.

Question 30

What does the ERC do

Answer 30

Provides a voice to sector as well as setting standards and safeguards to protect consumers.

Question 31

Code of conduct was created for equity release by the trade body in the early 90s, xxx . This has set standards since and evolved into the ERC.

Answer 31

Safe Home Income Plan (SHIP)

Question 32

The Standards Board exists to ensure all relevant products are safe for consumers. It sets the xxx, xxx and xxx for members of the ERC. The ERC has a xxx and xxxx for its members to follow.

Answer 32

code of conduct, standards and principles statement of principles and specific rules and guidance

Question 33

The ERC statement of principles requires members to:

Answer 33

* Ensure all their actions promote confidence in ER * Act in good faith always * Treating customers fairly * Conflicts of interest dealt with swiftly * Deliver suitable outcomes through the whole sale

Question 34

The ERC also has product standards, which ensure that all products:

Answer 34

* Have a fixed rate for each release of funds, or if there is a variable rate it must be capped for the life of the loan * Give customers the right to remain in their property for life or until moving into long-term care * Allow customers to move to a suitable alternative property * Have a no negative equity guarantee * Give customers the right to make penalty free payments, subject to lending criteria

Question 35

ER would not be suitable for funding the residential care needs of a sole owner because

Answer 35

because the money needed to pay the fees would be required once they entered care, which is when the arrangement would end, and property sold.

Question 36

Equity release is a big decision and some cases irrevocable, so it is important to ensure you

Answer 36

have looked at every other scenario before taking this route.

Question 37

Questions to ask about existing investments rather than equity release:

Answer 37

* What is the purpose of the investment, and can it be used instead of ER? * If income needed, are investments set to produce income? * If capital is required, are your existing investments sufficient to meet your goals, and can this negate the use of equity release? * Are there better ways to arrange the investment that still suits the clients risk goals?

Question 38

Equity release will reduce the value of the client’s estate either by

Answer 38

taking a value off sale proceeds or having a debt against the estate.

Question 39

Two typical choices on where to put capital following equity release:

Answer 39

* Investing to produce an income – typically this would be done with a LTC annuity, and provide definite income for life that can increase etc. This can also be done via equity-based investments, like a bond, or finally in deposit accounts which have high interest rates. These produce investment risk, and also inflation risk for the deposit account clients. * Withdraw regular amounts from drawdown equity release scheme – income not taxable and more of the property remains in the owner’s possession until the income is needed and provided. Cons are as follows – some providers charge for every withdrawal which is expensive over time, reduction in property value can restrict future income, common for further lifetime mortgage withdrawals to be based on interest rates at that time so interest roll-up can be expensive, lender can withdraw from market entirely and although original arrangement safe, no access to further funds.

Question 40

# Portability of equity release plans On a mortgage-based scheme, the loan to value (LTV) of the new property must be within the xxx. If outside, borrower will need to make xxx to make the LTV acceptable, and if this cannot be done, xxx in order to move house.

Answer 40

company’s normal parameters partial repayment whole debt must be repaid

Question 41

# Portability of equity release plans The flexibility offered by the product is another factor. Considerations in this regard should include the following

Answer 41

* Allow a new spouse to be added? * Allow a move to sheltered accoms, and what are the conditions? * Allow part or complete repayment, and what are the conditions? * Does the plan make any payment if borrower goes into LTC or dies?

Question 42

Once equity release has been set up, it is not usually possible to

Answer 42

add another party to it

Question 43

There is a discrepancy between LTC rules and equity release rules. LTC rules state that property is xxx if a non-owning spouse, partner or qualifying relative live there and property xxx sold if they go into care. Equity release rules state that if arranged on a joint basis, the joint owner can xxx, and on single life, when they enter care, xxx. This will happen regardless of LTC rules as the equity release rules are different and separate.

Answer 43

disregarded does not have to be stay until death or moved to care home everyone is evacuated from the property

Question 44

A lifetime mortgage is registered as a xxx against the property and will increase with the addition of rolled-up interest. The total debt will also be xxx from the value of the property when assessing capital. Any charge from local authority is xxx to the mortgage.

Answer 44

first charge deducted subsequent

Question 45

With a home reversion plan, the value of the part of the property that is taken by the company is not deemed as xxx as it was no longer theirs since the arrangement started. xxx cannot put a charge on it.

Answer 45

capital Local authority

Question 46

Equity release will reduce the size of the estate, but any cash raised gets

Answer 46

thrown back in