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Equity Release

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Sorry to be a bit serious, but Radio 4 is talking about Equity Release just now.

 

Are there any differences in the Isle of Man regarding Equity Release.

 

Anyone had any experiences over here or recommendations for a chat with someone?

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Maybe try CG Financial for a chat. I spoke to them about a mortgage and they were very helpful (and free)

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I have been told that it is a shocking rip off

 

I suppose it depends on the circumstances

 

A guy at work, who's in his 70s, has done it. He doesn't have any children or relatives over here, what few family that remains in the UK aren't at all close, so in his case why not release some equity in his house? Who's he going to leave it to when he dies?

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Always consider that equity release in real terms often means taking out an additional mortgage on your home. The equity in there is the perceived value above your current mortgage, and equity can change - especially if the market slows down (as is expected by many soon) and if house prices fall (expected by a growing number soon). The perceived equity can be eaten into and in some cases dissapear and actually go negative when this happens (mortgage > house value) - usually leaving people with monstrous pay-backs which are usually at high interest rates (interest rates are the usual cause of shocks to the housing market).

 

On the island things are bouyant at the moment, but could change in the future not just because of interest rates, but also because of the constant threats to the well-being of the finance sector (the worst-case double whammy!) where some people from the finance sector start leaving the island and housing supply > housing demand.

 

Personally, before I would consider equity release at this time (with a threat of further interest rate rises in the offing) I would be looking at the worst case - i.e. what if at some point in the future my house value fell by 30% and interest rates went up to 10% - is it still a sensible risk to take? I would also consider that it is far cheaper to borrow smaller sums over shorter periods using the perceived equity as collatoral, rather than add to a 25/20/15 year loan (or whatever time is left on the mortgage) i.e. £1 @ 15% over two years is far better than £1 at 8% over 20 years. In other words there are often other options that can be explored that don't have to tie people into something potentially horrendous. Whichever way house prices go in the near future - always remember that banks and building societies will always expect their borrowed money to be paid back.

 

I would speak to a couple of well-qualified financial advisors (not tied to relatively few products) before I would proceed - as to how I would best proceed.

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Good advice although I have some friends in their 70's with no family, and it has brought some financial freedom to them. But as Albert warns be careful. Perhaps a downsizing of your property would be a better way forward? There will of course in this instance be costs for removal, advocates and estate agents which will eat into your capital.

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Good advice although I have some friends in their 70's with no family, and it has brought some financial freedom to them.

 

That techically is not equity release but a home reversion plan.

 

If your in your 70's, no kids, and no need to pass assets on just bear in mind the property market is at the top of the cycle - do a home reversion plan that cashes in at the top of the market, you get the right to remain in the property until you die, spend the money having a great time and if the property bubble bursts f**k them. Spend the cash on foreign holidays (never do the house up its not yours anymore) and get a cheapo home help in who does special massages, and leave the home reversion company to worry about holding a depeciating asset if the market falls.

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Good advice although I have some friends in their 70's with no family, and it has brought some financial freedom to them. But as Albert warns be careful. Perhaps a downsizing of your property would be a better way forward? There will of course in this instance be costs for removal, advocates and estate agents which will eat into your capital.

 

Another option is to sell up totally and rent. If you invest the capital wisely the income alone would equal or exceed the rent payable on a nice apartment. On top of this you are no longer tied down to one place should you wish to do one extended final world tour.

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If your in your 70's, no kids, and no need to pass assets on just bear in mind the property market is at the top of the cycle - do a home reversion plan that cashes in at the top of the market, you get the right to remain in the property until you die, spend the money having a great time and if the property bubble bursts f**k them. Spend the cash on foreign holidays (never do the house up its not yours anymore) and get a cheapo home help in who does special massages, and leave the home reversion company to worry about holding a depeciating asset if the market falls.

I know a couple of people who have been approached by companies offering exactly this service. The only thing that worries me, if if the housing market drops and leaves the reversion company with a depreciating asset, what happens if they go bust? Are you out on the street or are there safeguards put in place?

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If your in your 70's, no kids, and no need to pass assets on just bear in mind the property market is at the top of the cycle - do a home reversion plan that cashes in at the top of the market, you get the right to remain in the property until you die, spend the money having a great time and if the property bubble bursts f**k them. Spend the cash on foreign holidays (never do the house up its not yours anymore) and get a cheapo home help in who does special massages, and leave the home reversion company to worry about holding a depeciating asset if the market falls.

I know a couple of people who have been approached by companies offering exactly this service. The only thing that worries me, if if the housing market drops and leaves the reversion company with a depreciating asset, what happens if they go bust? Are you out on the street or are there safeguards put in place?

 

Not sure. The right to live there in perpetuity is a contractual right of the contract you sign so as long as you keep your side of the bargain (most schemes insist the house is maintained to a certain level to safeguard their interests etc) even if the company goes bust I don't think they can physically kick you out. You'd have to breach some term in the agreement for them to do that. Of course techically any liquidator appointed if they went bust could say "Our surveyor says the house needs a new roof, pay £20k for a new roof or you've broken the contract and we'll take possession" as with all these things there are ways and means of getting what you want.

Edited by thesultanofsheight

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If your in your 70's, no kids, and no need to pass assets on just bear in mind the property market is at the top of the cycle - do a home reversion plan that cashes in at the top of the market, you get the right to remain in the property until you die, spend the money having a great time and if the property bubble bursts f**k them. Spend the cash on foreign holidays (never do the house up its not yours anymore) and get a cheapo home help in who does special massages, and leave the home reversion company to worry about holding a depeciating asset if the market falls.

I know a couple of people who have been approached by companies offering exactly this service. The only thing that worries me, if if the housing market drops and leaves the reversion company with a depreciating asset, what happens if they go bust? Are you out on the street or are there safeguards put in place?

 

Though the provider of such products does take on certain risks associated primarily with the life expectancy and the housing market. These risks will generally not be held solely by the provider (as in the case with insurance products).

 

Now, these risks encapsulated within the 'No Negative Equity Guarantee’ which specifies the mortgage will be capped at the lesser of the mortgages face amount and the sales proceeds of the home. The provider can hold these risk (if its balance sheet is strong enough and the auditor/regulators agree), hedge it via property derivatives, insurance markets or resell the risks on (typically to parties who know how to hedge the risks). [Technically speaking the nature of the risk is a ‘set of put options’ on the house with maturities corresponding to the distribution of the life expectancy of the people who take out the product.]

 

Hence, some one carries these risks but the sellers of the products are generally taking the spread and selling on the risk. If these products are miss-priced then as in the US-sub prime market it will be the investors who take a hit.

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Now, these risks encapsulated within the 'No Negative Equity Guarantee’ which specifies the mortgage will be capped at the lesser of the mortgages face amount and the sales proceeds of the home. The provider can hold these risk (if its balance sheet is strong enough and the auditor/regulators agree), hedge it via property derivatives, insurance markets or resell the risks on (typically to parties who know how to hedge the risks). [Technically speaking the nature of the risk is a ‘set of put options’ on the house with maturities corresponding to the distribution of the life expectancy of the people who take out the product.]

 

Hence, some one carries these risks but the sellers of the products are generally taking the spread and selling on the risk. If these products are miss-priced then as in the US-sub prime market it will be the investors who take a hit.

 

In English that means? Clearly you prefer to use bollocks terms to convey the fact that you understand the principles rather than to be arsed explaining things in a way somebody might actually understand them. I can't wait for your column. I think there will be a few "bullshit bingo" bets on it.

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Now, these risks encapsulated within the 'No Negative Equity Guarantee’ which specifies the mortgage will be capped at the lesser of the mortgages face amount and the sales proceeds of the home. The provider can hold these risk (if its balance sheet is strong enough and the auditor/regulators agree), hedge it via property derivatives, insurance markets or resell the risks on (typically to parties who know how to hedge the risks). [Technically speaking the nature of the risk is a ‘set of put options’ on the house with maturities corresponding to the distribution of the life expectancy of the people who take out the product.]

 

Hence, some one carries these risks but the sellers of the products are generally taking the spread and selling on the risk. If these products are miss-priced then as in the US-sub prime market it will be the investors who take a hit.

 

In English that means? Clearly you prefer to use bollocks terms to convey the fact that you understand the principles rather than to be arsed explaining things in a way somebody might actually understand them. I can't wait for your column. I think there will be a few "bullshit bingo" bets on it.

 

Just trying to be helpful. The text apart from [...] sentence I thought was understandable by just about everyone. The [...] sentence I included just for those who want precision, and are familiar with these ideas. If there is anything not clear then I am happy to clarify terms and/or provide references. With my column out today, any useful feedback would be appreciated. By training, I am a mathematician and by profession, I am an investor, and journalism is quite new to me. Saying this, I will take my column seriously and endeavor to produce carefully researched material that I hope is understandable and useful to the reader.

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