Equity release – the gift that keeps on taking

Thu 17 Oct 2013

You'd think that the financial services industry would still be smarting from the kicking it has received over PPI, endowment and pension-switch mis-selling. You might think it had learned the lesson that selling financial products to people who would later regret buying them because they were either overpriced, useless or deleterious to their pecuniary health, was generally a bad idea – not least because the regulator would eventually find the culprits out and make them pay their victims lots of compensation.

Would that it were so. Sadly, the lending industry is still finding creative ways to part the unwary, the naive and the plain greedy from their cash. So, who these days (apart from bankers) has enough money to make it worth a company's while to fleece them? The answer is, of course, pensioners, or at least the asset-rich, cash-poor babyboomers, who are sitting on a gold mine in the shape of their property, just waiting to be excavated by a nice equity release salesman.

I'll address the special pleaders right now with a declaration that, yes, equity release can be a lifeline for some people whose home is already so small that they can't downsize to release cash, or who need money for life-saving surgery in Moscow that is not available on the NHS. Equity release may even have a role in inheritance tax planning.

What I'm talking about is financial promotions that induce those who have a slender grasp of how compound interest works to do something frivolous or even downright stupid with money they are able to lay their hands on immediately by remortgaging their home with an equity release plan.

The latest of these marketing pushes tells us that selfless grandparents are taking out equity release to repay their grandchildren's student debt. According to research undertaken by one equity release firm with the International Longevity Centre UK, almost three-quarters of over-55s expect to dip into their savings to help grandchildren with university costs, while 4% of them will increase their mortgage or take out equity release to do so. This is little short of lunacy.

The numbers involved suggest that most of these grandchildren will not be doing MBAs at Wharton or doctorates at Harvard. The money will be going to pay off UK undergraduate debt owed to the Student Loans Company. Yet, UK undergraduate loans as they are currently structured are a kind of graduate tax, with repayments contingent on income received in the years after graduation, rather than the amount of money owed (like a mortgage or credit card). Paying off a chunk of the debt doesn't make the monthly payments smaller and it doesn't shorten the term except for very high earners. So, paying off some of the debt doesn't mean higher disposable income for the graduate – at least in the short term – and may actually just end up as a gift to the government.

That's because, according to the latest research, a massive 85% of students will never pay off the full amount they have borrowed plus interest before the debt is written off under the rules after 30 years.. Even government figures produced before the latest research was published estimate that 40% of students won't ever pay off their loans before they are written off. It therefore seems pretty clear that many of the grandparents who take out equity release to help with student fees are wasting their money.

Also on the "daft things to do" list is a suggestion by another member of the Equity Release Council that 55-year-olds might like to release money from their homes to spend on Christmas present. Its spiel goes: "Instead of buying him a new set of golf gloves, why not splash out on a one-to-one coaching session with a PGA professional instead? This is a once in a lifetime experience you could make possible." It continues: "Try spoiling your daughter and granddaughter with a trip to Reims for a weekend of champagne tasting and appreciation." Or how about aerobatic stunt flying for a grandson? "Is grandson a real daredevil? They will certainly never forget the experience."

The children and grandchildren of a pair of 55-year-olds who take out equity release to spend on Christmas presents may or may not forget the gifts. They are certainly unlikely to be able to ignore their older relative's distress 25 years down the line, when the loan has more than doubled under the weight of compound interest, one of the borrowers is now widowed and the mortgaged house is too big to heat properly, the stairs are awkward, the garden needs attention and the roof needs fixing. But moving is difficult now that grandma is older, and in any case the sheltered accommodation that relatives think might be suitable doesn't meet the lenders' borrowing criteria to port the loan.

Suggesting people borrow to pay for Christmas or fund university really is a study in cynicism.

Source; The Guardian

January 2017

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