Chapter 1- Introduction to Equity Release Flashcards
Definition of ER FCA regulatory Definitions Introduction to LTM and HRS Principles of ER Types of ER schemes When schemesv would be appropriate
What is equity?
Equity is the difference between value and secured loan on the property
What is equity release?
Equity release is the process where homeowners (aged 55 and over) are able to release money from their property whilst remaining in their home.
What are the two main products of equity release?
A lifetime mortgage and home reversion plan
What is the main difference between a lifetime mortgage and a home reversion plan?
A lifetime mortgage allows the homeowner keep ownership of their property
A home reversion plan requires the homeowner sell all or part of their property (losing ownership) therefore becoming a tenant in their property
What are the three types of a lifetime mortgage and what are their definitions?
- Interest only - Borrower has to pay payments of interest to the lender every month
- Interest roll up - The mortgage is interest only basis and the interest is rolled into the loan. At the end, the original loan and accrued interest is repaid
- Hybrid - The borrower is permitted to convert their interest only plan to a roll up basis at any time during the mortgage term
What are the benefits of a lifetime mortgage?
name a minimum of two benefits
- Ownership of the property is retained by the borrower (not sold)
- Many products don’t require monthly payments
- Some equity may be left for beneficiaries after debt has been settled from the sale of the property
- Borrower is allowed to use the cash raised / released how they see fit
What are the drawbacks of a LTM?
Name a minimum of 2
- Amount raised could relatively be lower than market value
- Debt may roll up quickly and erode any potential equity left
- Young borrowers are most likely to see a higher level of rolled up interest (due to them living longer)
- Their means-tested benefits may be affected
- Moving home will be subject to the providers product criteria
What is a home reversion plan?
It is a plan where some or all of the property is sold to the home reversion provider
What are the benefits of a Home reversion plan?
- Cash can be used how the home owner sees fit
- No monthly payments required
- No rolled up interest
- Guaranteed for some equity to be left to beneficiaries / owner (due to % that has been sold)
What are the drawbacks of a Home reversion plan?
- Owner loses ownership of their property
- % sold may not reflect true market value
- Means Tested Benefits may be affected
- Income based schemes may be restricted
- If the owner dies early in the plan may result in little benefit
- Moving home may be restricted to lender’s criteria
What are the 4 types of market participants and their roles?
(3 As and a P)
- Advisers (intermediaries) - authorised financial advisors providing advice to customers
- Arrangers - A party that makes the arrangements for a homeowner to enter into an equity release plan
- Administrators - a party responsible for the ongoing management of equity release plans
- Providers - firms that developed equity release plans available in the marketplace
What is a vulnerable customer?
Someone especially susceptible to detriment as a result of their personal circumstances, particularly when a firm is not providing appropriate levels of care
Who are the 4 market participants and their roles?
- LTM providers - insurance companies and insurance lenders
- HRS providers - specialist companies and venture capitalists
- Intermediaries - firms or individuals
- Specialist Intermediaries - match individuals
What is the role of the market participant lifetime mortgage provider?
- insurance companies and specialist lenders
- Limited to number of banks and building societies that have started offering LTM
- due to a number of previous experiences, it can be seen as an upward trend in the mortgage market
What is the role of the market participants home reversion plan?
- specialist companies and venture capitalists
- Raise funding on money markets
- Enter home reversion plans directly with the homeowner
- Become the previous owner’s landlord
- Sell all or part of the property with a lifetime lease
