Even The Rich Benefit From Equity Release

Friday 23rd September 2022

Just for clarity, I have no qualifications in Equity Release or any other financial matters. If I had - do you really think I would be an estate agent?!

I did work for a brief stint in a private client stockbroking firm in the City - which I loved. Unfortunately, my timing was poor. I was just getting into it as the Big Bang mergers took hold and I was called, along with half a dozen other junior brokers, into the senior partner’s office and all told we had to go, on a ‘last in first out’ principle. That’s just how it was in 1988.

I had not yet taken the financial qualifications and there were no jobs anyway, so I took my redundancy money (six months - seemed a fortune) and went to Australia for a year. Such fun.

Still no jobs in the City when I got back, so I fell backwards into Estate Agency.

Enough of the sob story.

To Equity Release…

Fifteen or so years ago, I found a growing trend of elderly people (mostly ladies) asking me if they could sell their property and move to a smaller one in the same area. On visiting, I would discover that it was only a small flat anyway, so downsizing, moving locally and releasing cash was a hopeless fantasy. Out of the question, especially with sales costs and Stamp Duty.

They wanted to release cash as they were struggling on their current incomes.

Often, the cause of the person’s distress was there had been a service charge cash call to redecorate the interior, exterior or even to replace the lift. Finding even £10 or £20k was not possible for someone barely making ends meet.

Sinking funds were not that common then - I am constantly surprised how often we still come across self-managed buildings without a pot for refurbishments.

The flats themselves were nearly always in need of updating and it would have been very easy to sell them, as in those days everyone wanted an un-refurbished flat in prime London. Less so these days, with building materials and contractor costs so high – people often prefer a finished ‘product’.

However, I could never push these elderly and often pretty vulnerable people to sell. Believe me others did.

Despite increasing care needs the ladies were generally reluctant to move in with family or even to move nearer to them, if it meant leaving their beloved Chelsea or Knightsbridge. Most were fiercely independent and wanted to stay where they knew, going to the local shops and seeing their few remaining friends. Sometimes these friends were their cleaner, postman and the hairdresser who they had been going to since time began.

I tried to look at each person’s situation holistically including exploring all the options allowing them to stay, and most of the time it would come down to looking further at Equity Release.

Equity Release Resistance

Fifteen years ago, Equity Release still had a bad reputation, probably deservedly. Compound interest rates had been quite high, which in turn meant the loan to value which the lenders could offer was pretty low - perhaps up to 25% for a 75-year-old lady. The cost of the original debt plus the compound interest could stack up pretty quickly.

Most of the ladies themselves were quite happy to borrow against their flat if it meant they could stay put and go out ‘feet first’. I found it was the daughters who were the main resistance to their mothers taking out Equity Release.

Many a time I was told ‘Mummy is fine’ and there was no need to burden her with debt. What they really meant was, ‘that is my inheritance you are talking about’.

These daughters seemed happy to see their mothers in penury, and the sad thing was the elderly lady could see that for what it was.

On a couple of occasions, I had to be pretty blunt. ‘Either you help your mother financially, or she needs to take Equity Release.’

Fortunately, Equity Release has improved massively and is now really quite a benign and tax-efficient way to release capital.

The most common use of this capital is to help cover living and care costs. Something which is becoming ever more necessary as the NHS struggles and nursing or care home costs skyrocket.

Cash can be given (hopefully in an IHT friendly fashion) to children to put a deposit on purchasing their own property, or to pay for grandchildren’s school fees or tutors. Sometimes, they simply use the money to have a family holiday in a lovely spot once a year. All benefits that can be witnessed and enjoyed in the lifetime of the elderly person rather than waiting until they’ve popped their clogs and the tax man has taken his 40%.

It is now possible to do what I call a ‘gradual drawdown’ Equity Release which means in practice agreeing a notional figure to be borrowed but only drawing down the cash as and when it is needed. This has two major advantages, the first is that the compound interest is only on the amount actually drawn down thus lessening the amount of interest ultimately paid. The second is the net effect of this lesser compounding means a larger notional figure – loan to value – can be agreed so the arrangement can last longer. Hopefully as long as necessary.

If the loan lasts longer, it may even be possible to go back for a top-up sum. In actuarial terms an older person lives less time so can be lent a greater proportion. Plus, the property may have gone up in value in the timeframe.

Lower interest rates have helped but obviously these are changing as we speak!

The final and huge unspoken advantage is that any funds drawn down are entirely tax free.

So now to the rich - or at least the well off.

No longer is Equity Release only for those who cannot make ends meet.

This tax-free point makes it entirely feasible and indeed very tax efficient to use Equity Release – especially by the gradual drawdown route, to fund an affluent lifestyle in retirement.

No need to sell that second home and pay CGT @ 28%. No need to sell those stocks and shares and pay 20% CGT. Keep those assets, continue to enjoy them and use Equity Release to supplement your income.

If a person is really quite well off, they can give away significant sums to family to help them. When the property securing the debt is eventually sold to pay it off, it comes off the Estate, so lessening IHT.

Is there a downside?

Not many that I can see.

Clearly, it is important to carefully assess and manage the situation throughout.

In an ideal world the size of the debt should leave enough to pay for some years in a care home when the flat or house is sold. An average stay in care homes is 2 1/2 years. Longer for dementia patients who are often physically fine even as their cognitive functions depart

Using a truly independent financial advisor is of paramount importance. The ones who are linked to the Equity Release lenders do tend to push their own pet products and prefer people to take lump sums rather than draw it down gradually

In my mind it is the gradual drawdown facility which works best for most

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How does this all affect conveyancing? I am not sure I know for certain. If people stay put for longer there may be fewer transactions. More likely, they will just be delayed or take another form.

I have tried to find a way to make suggesting people use equity release work as an agent. I don’t earn any fees putting people off selling!

But if it’s the right thing, I do it and hopefully we eventually get the property to sell.

On one occasion I even had one of those resistant daughters come back to me to sell her mother’s flat. Acknowledging it had been the right thing to do.

It helped that her mother had gifted her some money in advance and the flat had doubled in value in the timescale!

Until next time.

Patrick's Property Politics