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Net benefits

The equity-release market has never been more competitive, driven by increased consumer demand, massive house price inflation, an ageing demographic and, of course, a growing pension deficit.

This is a phenomenon witnessed across the globe from Australia through Sweden and Ireland to the US. As a result, more and more are turning to equity release as a retirement planning solution.

Historically, the equity-release industry has not always had the best press. It is viewed with suspicion bordering on hostility by some sectors of the media and consumers groups such as Which? have been highly critical of the products, calling them “high risk” and, at worst, “an option of last resort”.

We would beg to differ on both these points but by far the most unjustified criticism levelled at the industry is that it is prohibitively expensive.

Just look at the evidence. If you review the products offered by the top 10 equity-release providers, the average interest rate on an annualised basis works out at 6.14 per cent, with the most competitive rates below 6 per cent. In comparison, if you examine the standard variable rates on mortgages available from the top 10 mortgage lenders, as determined by Council of Mortgage Lenders figures, their standard variable rates average out at 6.49 per cent.

Now, this is not exactly comparing apples with apples as very few clients remain on the standard variable rate for any length of time and the method of funding conventional mortgages differs from that of equity-release products. But given the long-term nature of equity-release funding, I would argue that these rates are even more competitive.

These rates are fixed for the life of the loan, unlike with mainstream mortgage rates that can fluctuate with any change in the base rate. A typical lifetime mortgage term is 15 years. Can anyone predict with any certainty movements in the Bank of England base rate over the same period?

Consider this. According to Moneyfacts, there were 57 base rate changes between February 1991 and August 2006. For elderly and often vulnerable clients on a fixed income, this unpredictability is unsettling.

Looking at where we are in the interest rate cycle, we are still enjoying a five-year period of historically low interest rates and even the recent quarter-point rise only takes us back to where we were in August 2004.

Clients taking out an equity-release mortgage will see this reflected in the increasingly attractive rates on offer. It should also be remembered that they will never have to make a single payment as the debt accumulates until they pass away or go into care before being subtracted from the estate. Far from being high risk, this knowledge is the very security most valued by equity-release clients, as is the guarantee of no negative equity.

The population is ageing, pensions are becoming increasingly inadequate and the Government has tried and failed to come up with a coherent method of resolving this. No wonder many people are looking to their single biggest asset – their home- to supplement their retirement income.

Is equity release the solution to the pension crisis? Not in isolation but it has a role in strategic pension planning, particularly with the advent of flexible drawdown options.

These options enable clients to effectively use their home as a bank, drawing on its equity only if and when they need it, rather than accumula- ting interest on a bigger amount than individuals actually need.

Rather than being an “option of last resort”, equity release becomes a potential financial safety net in retirement.


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