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Equity Release Flashcards

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1
Q

What is equity release?

A

The net market value of a homeowner’s residual wealth tied up in their property, calculated as the value of the property less the total value of any debts secured on it.

Example: A property valued at £200,000 with an outstanding debt of £50,000 has an equity of £150,000.

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2
Q

What is positive equity?

A

Occurs when the market value of the property exceeds the value of any obligations secured on it.

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3
Q

What is negative equity?

A

Occurs when the total value of obligations secured on the property exceeds the market value of the property.

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4
Q

During which economic events did negative equity become a concern?

A

The early 1990s property market slump and the global financial crisis starting in autumn 2007.

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5
Q

What impact did the COVID-19 lockdown have on the UK housing market?

A

House sales dropped to their lowest level since 2011.

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6
Q

What was the effect of the ‘mini budget’ of autumn 2022 on house prices?

A

Led to a series of fast-paced interest rate rises, resulting in a fall in house prices.

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7
Q

Who is typically affected by negative equity?

A

Homeowners who may find themselves locked into mortgages due to falling property values.

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8
Q

What is a capital repayment mortgage?

A

A mortgage where some capital is repaid each month along with interest, gradually increasing equity.

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9
Q

What is an interest-only mortgage?

A

A mortgage where the capital debt remains constant until the mortgage is redeemed, with interest paid only.

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10
Q

What is the primary way to release equity from a property?

A

Selling the home and buying a cheaper one, known as downsizing.

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11
Q

What are the two generic types of equity release products?

A
  • Lifetime mortgage
  • Home reversion plan
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12
Q

Why is there an increase in demand for equity release products?

A

Due to the fundamental difference between income and wealth, with many being ‘asset rich, cash poor’.

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13
Q

What are the two main purposes for releasing equity?

A
  • Income generation
  • Capital liquidation
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14
Q

What factors have influenced the recent demand for equity release?

A

High interest rates, lower loan-to-value ratios, and significant economic uncertainty.

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15
Q

What was the amount of new equity release lending in 2022?

A

£6.2 billion.

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16
Q

What is the average interest rate for equity release products as of December 2023?

A

Just under 6%.

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17
Q

What are the five most popular reasons for releasing equity in 2023?

A
  • Clearing existing mortgage: 41%
  • Making home improvements: 28%
  • Holidays: 20%
  • Day-to-day living: 17%
  • Consolidate unsecured debt: 16%
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18
Q

What has been a recent trend in equity release product availability?

A

An increase in the number of providers and product choice.

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19
Q

What is ‘gifting with warm hands’?

A

Helping younger family members onto the property ladder by releasing capital from their property.

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20
Q

What demographic has shown increased interest in working again due to financial pressures?

A

58% of individuals aged 50-65.

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21
Q

What is the expected debt level for people aged over 55 by 2032?

A

£402 billion, an increase of 61% in 15 years.

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22
Q

What environmental targets have the UK Government committed to?

A

Ceasing the sale of petrol and diesel cars by 2035 and promoting clean domestic energy use.

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23
Q

What is the expected debt level in the UK by 2032?

A

£402bn

This represents an increase of 61% in just 15 years.

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24
Q

What is driving demand in the equity release sector?

A

Refinancing debt without unmanageable repayments

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25
What environmental target has the UK government set for 2035?
Ceasing the sale of petrol and diesel cars
26
What is a consequence of the government’s environmental targets on households?
Higher capital costs of substitute technology
27
What is the estimated break-even period for a family installing a heat pump?
Fifth year after installation
28
What are 'green mortgages'?
Mortgages designed to be more environmentally conscious
29
What demographic trend is affecting the UK’s pension system?
Declining birth and death rates
30
What is a projected consequence of demographic trends by 2070?
Five million more pensioners and one million more working-age individuals
31
What is the Basic State Pension based on?
National Insurance contributions and credits
32
What are the two generic types of occupational pensions?
* Defined Benefit (DB) * Defined Contribution (DC)
33
What is the main characteristic of a Defined Benefit scheme?
Provides a guaranteed minimum pension based on salary and years of service
34
What is a key risk associated with Defined Contribution schemes?
Pension amount depends on investment performance and market conditions
35
What is a significant issue for self-employed individuals regarding retirement?
Inadequate provision for retirement
36
What impact do lifestyle choices have on retirement savings?
Prioritizing current spending over saving
37
What are the advantages of equity release?
* Converts home equity into cash * Flexible cash withdrawal * Allows customers to remain in their home * Many products are portable
38
What are the disadvantages of equity release?
* Reduces estate value * Set-up costs may apply * May affect means-tested benefits
39
What is a lifetime mortgage?
A mortgage allowing customers to raise capital without mandatory repayments
40
What is the 'rule of 72' used for?
To estimate how long it takes for debt to double based on interest rate
41
What is a shared appreciation mortgage (SAM)?
A mortgage where the lender takes a share of the property value increase instead of interest
42
What is a consequence of falling annuity rates?
Lower-than-expected returns for pension investors
43
What was the status of annuity rates as of December 2023?
Increased by 54% in the preceding two years
44
What is the typical minimum age for accessing lifetime mortgages?
55 years
45
What are home income plans?
Legacy products that tied mortgage repayments to income generated from investments
46
What is a shared appreciation mortgage (SAM)?
A mortgage that allows a customer to raise capital and make no payments to the lender, who takes income from a share in the increase in property value. ## Footnote SAMs were introduced in the 1990s and gained publicity due to their unique design compared to existing mortgage products.
47
Why did shared appreciation mortgages become less attractive to mortgage providers?
The ability to manage risk was heavily dependent on purchasing suitable hedging instruments, which became difficult due to market conditions in the late 1990s. ## Footnote Adverse publicity over excess profits during rapid house price growth contributed to their decline.
48
What is the main difference between a shared appreciation mortgage and an equity share mortgage?
In an equity share mortgage, the borrower is charged a lower interest rate for the lender's share in the equity upon disposal of the property. ## Footnote Unlike SAMs, equity share mortgages are still being offered by lenders.
49
What does a home reversion plan allow a homeowner to do?
Sell their property or a portion of it to a home reversion plan provider to raise funds, while continuing to live in the property as a tenant or co-owner. ## Footnote Home reversion plans make up less than 1% of the equity release market.
50
How does a home reversion plan differ from a mortgage?
A home reversion plan involves a legal conveyance of the property or a share of it, whereas most equity release products are mortgages. ## Footnote The former owner becomes a tenant or part owner.
51
What are the options for rent payments in a home reversion plan?
Options may include: * No rent * Fixed rent for life * Rent that increases by a specified annual percentage.
52
When was the first home reversion plan introduced?
In the 1960s as an income reversion scheme, which was the precursor to all forms of equity release.
53
Why are home reversion plan providers willing to offer more finance than lifetime mortgage providers?
Home reversion plan providers are generally prepared to purchase a 25–100% stake in the property, balancing reward with risk.
54
What is the essential difference between lifetime mortgages and home reversion plans?
Lifetime mortgages are loans secured by the property, while home reversion plans involve the sale of the property or a share of it. ## Footnote This distinction affects the customer's estate and rights to benefits.
55
What is equity release?
The process of liquidating the wealth tied up in a property, often to generate income or raise capital for personal needs.
56
What are the two generic types of equity release products?
* Lifetime mortgages * Home reversion plans.
57
What are the implications of negative equity for homeowners?
* Shortfall between property value and outstanding debt when selling * Deferred house move decisions * Lower LTV ratios on new mortgage offers * Difficulty obtaining mortgage finance.
58
What are the implications of negative equity for lenders?
* Higher risk of loss in case of default * Greater uncertainty in new lending risks * Difficulty negotiating terms with mortgage indemnity insurers.
59
What are the two attractions of annuities?
* Guaranteed income for life * Income representing interest plus return of capital.
60
What is the first type of equity release product introduced in the UK?
Shared appreciation mortgage.
61
What factor accelerated the emergence of new mortgage products during the 1980s?
Deregulation.
62
In relation to lifetime mortgages, which of the following is correct? * The minimum age of the applicant is set down by law. * The interest rate is usually fixed at the start of the contract. * There is a maximum term of years for the contract. * If the applicant makes interest payments, these cannot usually be waived.
The interest rate is usually fixed at the start of the contract.
63
What pension scheme will provide the investor with a guaranteed minimum pension?
Final salary scheme.
64
What product was most often sold alongside a home income plan to provide a guaranteed income?
Annuity.
65
An inevitable consequence of negative equity is that:
It will be difficult for some homeowners to move home.
66
In recent years, demographic trends in the UK have shown an:
Declining birth rate and increasing death rate.
67
Why have defined contribution occupational pension schemes become more common in the UK?
They are less risky for employers than alternative schemes.

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