Equity Release – why ‘not now’ is so important…

Uncertainty sucks

The current economic uncertainty isn’t great news for anyone. Markets like to know what’s going on and what’s coming down the line. The less stability and certainty they find, they more they worry…. and worry leads to costs!

Over recent months, residential mortgage rates have risen as the Bank of England has increased base rates, now they seem to be falling as banks compete. At the same time, equity release lifetime mortgage rates have also risen – and much more sharply. The differential is due to many factors in how the product is funded and that’s not the point of this article… the point here is that the equity release advice conversation just developed a new MVQ (most valuable question).

MCOB’s take on things

MCOB 8.5A.6 (2)says that the adviser must consider alternative methods of raising funds. Most advisers have a good fact find list of alternatives and run through them with the client. The one that not all advisers seem to consider, though, is ‘could you defer releasing equity?’ In other words, is ‘not now’ a viable option?

So why is that important?

Well, take a look at residential mortgage rates. Look at 2 year and 5 year fixed rates… what do you find? Longer term fixed rates are cheaper than shorter term fixes – partly because the market is viewing interest rate rises as a necessary evil for now but not necessarily a long term fixture.

Macro economics tells us that interest rate rises are useful to tackle inflation predominantly where the inflation is fuelled by demand.. where it is driven by rising input costs it is less effective. Equally, it tells us that when the economy falls into recession interest rate cuts are likely to be a means of providing stimulus to restore growth.

The truth, of course, is that nobody really knows what’s going to happen in the next couple of years. If we did, we’d be guaranteed untold riches. But what we do know is that most equity release contracts are based on rates fixed for life and those rates are currently significantly higher than they were not so long ago.

When it’s right it’s right

It doesn’t mean that the client shouldn’t be looking to release equity now and, of course, many plans have fixed early repayment charges that would allow the client to rebroke if rates fall (provided the capital and interest accrued doesn’t breach LTV), but if you lock a client into a fixed rate now without at least discussing and documenting the reasons why now is the right time to release funds, you might leave yourself exposed.

Like so much of good advice it is about going that little bit further in the fact find discussion. Looking at the current situation of the client and the market and considering the possible options. There’s always the chance that rates will get even higher before the client decided to act, but that’s all part of the chat…

So there you have it… the new MVQ – ‘is deferring for now an option for you?’

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NOTE: All thoughts here are my own and shouldn’t be taken to constitute financial advice. This is intended for the use of professional, authorised and regulated financial advisers only and not for consumers. Equity release is a regulated area and consumers should seek advice from an appropriate professional.