INSIDE MONEY: PROGRAMME 5: “SITTING ON A FORTUNE” Presenter: Lesley Curwen Listener: Brian Moore Producer: Jennifer Clarke First broadcast Saturday 23rd August 2003 at 12.00pm on BBC Radio 4, Repeated Monday 25 August 2003 at 3.00pm on BBC Radio 4 THIS IS A TRANSCRIPT OF THE LONGER REPEATED VERSION CURWEN: If you’ve been tempted to use some of the money tied up in your house to boost your finances, don’t do anything until you’ve heard this programme. You might think it’s the perfect solution. ANNOUNCER: “The extra income plan allows you to utilise your greatest asset, your home in exchange for an extra income with the option of a cash lump sum but without having to sell up and move home.” CURWEN: Promotional videos like this suggest equity release, as it’s called, is an easy way to free up cash either as a lump sum or as a regular income. It’s big business. More than a billion pounds has been unlocked in this way but is it as simple and straightforward as it seems? Brian and Joyce Moore are just one of the thousands of couples currently considering raiding their home piggy bank in this way. They live in Burbage in Leicestershire and lead an active life, much of it in the garden. J. MOORE: “Oh Brian this is really hard work getting all this soil up and it’s so heavy.” B. MOORE: “Pick it up with your trowel.” J. MOORE: “Yea, yea, you know if this was a lawn…” CURWEN: Brian worked for many years in the electronics industry and has some money coming in from company pensions. Together the couple’s joint income is under £12,000. Although they can just about manage on that amount of money, they’re worried about the future. B. MOORE: Well I’ve reached the grand old age of 70 and my wife’s 69. We’ve both been retired for about five years. We’re in good health. We live a full and active life but lately we’ve started to dip into our savings which are now going down and not being replenished. So we thought why not use the money that’s tied up with our house, it’s fully paid for, it’s ours and we could perhaps draw off that either on a monthly basis or as a lump sum and use that to continue the life that we’ve become accustomed to. CURWEN: And that life is not extravagant. Any extra money will be used to fund the odd weekend away, treats for the grandchildren and a second-hand replacement for their car. The kind of thing they now pay for with their hard earned savings. Of course the most straightforward way to release cash from property is to sell it and buy somewhere cheaper. Brian and Joyce aren’t prepared to consider that. B. MOORE: I don’t want to move. I like this area. We’ve lived in this house for about fourteen or fifteen years. Both our sons were born in this area. We know a lot of people, we’ve got friends. I honestly couldn’t face a move, it’s a big thing, quite happy to stay in this area for the rest of my days. CURWEN: Taking some money out of the value of their home will affect the amount they can pass down to their family when they die. That doesn’t worry them. B. MOORE: We’ve spoken to both our sons. In fact I think it was my youngest son that suggested the idea to us, even though we’d kind of thought about it. He said, “look mum and dad, we don’t want your inheritance, we’re quite well off. Why don’t you use some of the money that’s tied up in your house.” My oldest son, we mentioned it to him and he thought it was a great idea. CURWEN: Brian and Joyce have been talking between themselves about raising perhaps an extra £2,000 a year. Equity release seemed to them to be a heaven-sent way to achieve this. They weren’t sure whether they’d want a lump sum or a monthly payment. In fact they weren’t clear at all what was involved. Brian decided to join “Inside Money” to find out more so the two of them could work out whether to take the plunge. The starting point for raising any money from your home is to find out its current value. Our couple live in a two-bedroomed house which they bought for £25,000 fifteen years ago. They know it’s worth a great deal more now but how much more? We called in a chartered surveyor for an independent estimate. David Johnson works for Readings in Leicester and knows the area well. B. MOORE: When we first bought the house the conservatory was just a few feet wide, not much good, so we had the thing extended to its present size. JOHNSON: This is quite a large conservatory. B. MOORE: This is a large conservatory. JOHNSON: This is probably about 5 metres or 4.5 metres. B. MOORE: Well it’s 16 foot in old money, I think, something like that. CURWEN: David continued round the house clipboard at the ready. What was the verdict on price? JOHNSON: What we’ve got here is a 1930s built semi- detached house. It’s got two bedrooms and then we’ve got the original living-room, a combined kitchen/dining room on the ground floor. We’ve got a large conservatory off the back. Having had a look round and just seeing that we’ve got the benefit of a garage at the back, I would have thought that for mortgage purposes we’re probably talking in terms of valuations of around £150,000. CURWEN: Brian. B. MOORE: That’s about what I estimated. So yes, I’m quite pleased with that. CURWEN: That valuation of £150,000 would help to determine how much they could borrow. Their ages would also be a key factor. We set off to find out how equity release might work for them. They were both aware that they were on the edge of a huge undertaking. Using your home to provide income has proved extremely controversial in the past - as our sister programme “Money Box” reported back in 1993. ALISON MITCHELL: “This week the insurance ombudsman’s been riding to the rescue of some investors who took out home income plans linked to investment bonds. These schemes look like life savers when house prices were going up and shares were buoyant. But times changed and…” CURWEN: Old style home income plans caused a huge scandal. They were seemingly ingenious products. People remortgaged their houses and invested the money they borrowed on the stock market in the hopes that would pay the mortgage interest and provide extra cash. But as share prices fell and interest rates rose, people found themselves trapped owing more than the value of their homes and in some cases facing eviction. Many have since received compensation. To date £52 million has been paid out to almost 4,000 people. This dangerous type of scheme was banned and a new organisation was set up to try to rebuild confidence in other better forms of equity release. It’s called Safe Home Income Plans or SHIP for short and its members, including most of the major players, give guarantees about what their products will do. Brian and I spoke to Jon King, president of SHIP about what it offers. B. MOORE: What I’d like to know Jon is would my money be guaranteed if I had a SHIP product? KING: That’s right. Essentially there’s four guarantees to the SHIP code. Firstly, there’s a no negative equity guarantee. In other words you can never owe more than your house is worth. Secondly, you have independent legal advice and that is offered to you by an independent lawyer who will sign a certificate saying that he’s explained all the pros and the cons of the scheme and he’s acting purely and simply on your behalf. B. MOORE: Is there a cost involved in that Jon? KING: There is a cost. Any equity release scheme requires you to have a lawyer acting on your behalf. The third guarantee is that you’re guaranteed tenure for life, you’re guaranteed to be allowed to live in that house for the rest of your life. And the final, and perhaps the most important guarantee is that you’ve got freedom to move in the future without a financial penalty. What SHIP has never been is a regulator though. SHIP is about a minimum set of product standards. You still have to shop around amongst product providers to make sure you’re getting the best possible deal as you would in the purchase of any other product. CURWEN: We now needed to get some personal advice for Brian on what kind of products are on offer. We turned to Colin Taylor, the managing director of a specialist independent financial adviser called Key Retirement Solutions. His firm only sells SHIP approved products, so whatever he might recommend would have the safety features we’d heard about. When Colin met Brian the first thing he did was to check the couple wouldn’t rather move house to free up some money. Then he made sure they didn’t mind if their children’s inheritance was wiped out. It was a marathon session and you can find the transcript of what was said on our website at www.bbc.co.uk/insidemoney. Colin described the different forms of equity release on offer. There are two main types. With one you sell part of your house. With the other you take out a loan against its value. In both cases the money you get is not repaid until you die or go into care. Let’s start with the first type, the home reversion plan. TAYLOR: All you do is simply sell part or all of your property for a lifetime lease and a cash lump sum or an income for life. You live there rent free for the rest of your life. With your property, £150,000 property, if you sold 50% of that property, you would actually receive around about £30,000 as a lump sum. CURWEN: But that means that you are getting less than half the true value of the property. Why is it so much less? TAYLOR: That lump sum is depending upon your age and your wife’s age and it’s dependent on life expectancy. Once you’re over a certain age, 69, 70 your life expectancy would be around about 85, 86. So therefore you’re living in the property rent free for sixteen years and within that time the investment company won’t realise a penny of that cash. You know if you were 80 years of age you’d probably end up with somewhere in the region of £75,000 to £80,000 as a lump sum. So the older you are the reversion scheme comes in to its own more. CURWEN: Does that make sense Brian? B. MOORE: It makes more sense but I’m not sure I like the idea. It seems that I’m getting far less than I would have expected. TAYLOR: It just comes down to what you yourself actually prefer. The reversion plan is a plan where you actually know from day one exactly where you are. You can actually say, well I’ve sold 50% but I’ve got 50% and always will have 50% and whatever value that goes up that goes to my dependants. So there is a need for reversion but it doesn’t suit everybody. CURWEN: Clearly, Brian was not too impressed. Colin went on to the next main form of equity release, what’s called a roll- up mortgage where the householder gets a loan but he doesn’t repay the capital and he doesn’t even pay the interest on it. That interest just carries on rolling up over the years like a snowball. TAYLOR: You take out a mortgage and the interest on that mortgage is rolled up slowly, well slowly and it speeds up towards 15, 20 years but it’s rolled-up interest on top of the loan until you either die or you redeem the mortgage. CURWEN: So from the consumer’s point of view, you’re not actually paying interest monthly, but interest is added to your loan? TAYLOR: Yes that’s correct and then interest is added on to interest as well, so it’s accumulated over the years. Brian, for instance, could have borrowed £37,500 under this plan and after fifteen years he would have owed £69,443 in interest. On top of your original £37,500 that means you’d owe £107,438 in total. CURWEN: We’re talking about three times the money that you’ve actually got out of it. TAYLOR: Yes you are. CURWEN: How do you feel about that? B. MOORE: Worried about that. It sounds an awful lot. CURWEN: By now Brian had heard about both types of equity release, each has pros and cons. The advantage of a reversion plan is that you know exactly what proportion of your home will remain yours. The downside is you get substantially less than the market price for the part you sell off, perhaps as little as half its real value. With a roll-up mortgage you get extra money and stay in your home for as long as you need. But the disadvantage is you won’t know what it will cost you in mounting interest charges. That won’t be clear until the day the house is sold and there might be nothing left for you or your family. Of course if your house goes up in value that might counteract the growing pile of interest. One reason that it grows so quickly is that interest rates on a roll-up mortgage are higher than usual at around 7%. Brian’s head was reeling with all the figures and the various implications of trading in some of the ownership of his home. But there was one thing in particular on his mind. B. MOORE: What if my partner or myself go into care? TAYLOR: If your partner went into care, for instance, Brian and you were still living in the property, there would be no difference whatsoever, you remain in the property. If your partner or yourself had passed away and the last surviving partner, put it that way, went into long-term care, they would then have six months to a year to sell the property, but the property would normally be sold if it was long-term care and you were there for life. CURWEN: Brian had by now realised the whole issue with equity release was far more complicated than he’d expected. Having talked at length about what was on the market, Colin Taylor had a novel idea for a more flexible type of product which might be right for Brian and Joyce. Be warned, it’s a bit of a mouthful. TAYLOR: To my mind then the scheme that fits the most is the draw-down rolled-up fixed-rate mortgage. CURWEN: Did you get that? TAYLOR: The draw-down rolled-up fixed-rate mortgage. All that simply is, is a fixed-rate mortgage where the interest is rolled-up but you only draw down what you need when you need it and there’s a couple of schemes on the market. B. MOORE: How would that work, what would that cost me? TAYLOR: It’s very difficult actually to work out the interest on a type of scheme like that because it depends on what you draw. So although you’ve said to them, “yes, I’ll have £30,000”, and they lodge that for you, and you draw that down as and when you need it, and you only pay interest on that accumulated amount, it will compound like the other ones. But obviously if you only use £2,000 this year and you use £5,000 next year, then the year after you’ll be paying interest on £7,000 plus interest. But you’ve then got a reserve to be able to call on when you need it, as you need it. CURWEN: It sounds complicated but it would mean Brian and Joyce wouldn’t have to take a large chunk of money out of their bricks and mortar piggy bank. They could just dip into a prearranged reserve when they needed it, a sort of giant overdraft which means the interest grows far more slowly and the value of their house is eroded less. With this sort of deal the reserve on offer would be of £37,500, an amount determined by the value of the house and their ages. So what was Brian’s reaction? B. MOORE: Well I think I’ve heard some very good advice this afternoon. Some of it takes a little understanding and I think when I’ve had time to study it, it’ll make a lot more sense. I didn’t think it would be as easy as I first imagined it to be, but like any scheme involved in money you have to think about it and quite a while before you actually take the final decision. CURWEN: But there are even more things to consider and you can get further information about all this from our website. Taking out an equity release product might affect your liability for inheritance tax if your estate is big enough. And if you’re getting extra income from the value of your home and you’re a tax payer, it could affect your income tax bill and it can have an impact on means-tested benefits. At the moment around a third of all households aged over 60 are entitled to such benefits and the system is about to get a whole lot more complicated. ANNOUNCER: “Thank you for calling the Pension service. If you’d like to make an application to pension credit, please ensure you have your national insurance number at hand.” CURWEN: From October this year, the government is changing the way many older people are paid state support under the new pension credit. As a result larger numbers will be drawn into the benefits net. Brian and I went to see Sally West, the benefits expert at “Age Concern”. B. MOORE: Are benefits affected when people receive a lump sum or extra income? WEST: That’s an important point. It could well be that if people receive income or capital from an equity-release scheme, then this will reduce the amount of social security benefits they get or it could mean that certain benefits stop altogether. Anyone who’s receiving the income-related benefits such as income support, also called minimum income guarantee, and the council tax benefit really needs to look at their benefit position. CURWEN: Brian and Joyce aren’t receiving any of those benefits at the moment, but does that mean that will stay the situation for them forever? WEST: One important thing is that in October this year, the new pension credit is introduced and this is a new entitlement which is actually more generous than the current system. We’re clarifying exactly how equity release income and capital will work with pension credit. But it may be that, for example, a type of income that is currently assessed won’t make the same difference to pension credit. On the other hand, more people will be entitled to pension credits, so more people are potentially in the system where income or savings from equity release will affect them. CURWEN: It sounds potentially very messy. WEST: It’s a complicated situation. I think you often get that with income-related benefits. But it does show the importance of people taking advice about their own individual circumstances. CURWEN: In other words, people who get council tax benefit or housing benefit need to make sure they don’t gain from equity release only to lose out on the benefits front. Brian had by now gathered lots of advice and information but being a cautious man, he wanted to know how safe equity release policies are and what protection there would be if things went wrong. At the moment, strange as it may seem, none of the products we’ve heard about are actually regulated. But from next autumn the watchdog, the Financial Services Authority, will regulate the rolled-up mortgages which it has called lifetime mortgages. When it looked at these it decided they were high risk and therefore need special treatment. We went to the headquarters of the FSA to see Susan De Mont, its head of mortgage policy. B. MOORE: I understand that the regulations are going to change in October 2004. What can you tell me about this? DE MONT: The main thing that you need to know is that we will be regulating how firms sell the product to you, how they give you advice. So where they give you advice on one of these products, they have to choose the most suitable product for you. The second important thing is we’re going to standardise the information that consumers will get about the products, so that every firm must give you information about what you’re buying before you buy it, so that you can use that information to compare one product with another, one lender with another. And the other final thing to say, is that you will have access to the financial ombudsman service and he does have the power to make binding awards on firms where you’ve got a valid complaint against a provider. We will also, in the worst case, if your firm fails and you have a complaint against them, you have access to our compensation scheme which would give you financial reimbursement. CURWEN: The FSA has said that it considers these products to be high risk potentially. Why? DE MONT: Lifetime mortgages we do consider to be high risk. One of the things that’s a common feature of these lifetime mortgages is that interest is rolled-up and added to the loan. The problem with that is the amount of the debt can rise very quickly and at current interest rates you might find your loan could double in ten years and that’s quite a big risk for people to take on. In the new regime you will have a table that will explain what the impact of that interest roll-up is and it will show you what the debt outstanding will be in years to come. CURWEN: Brian wanted to see how this would work, so Susan De Mont showed him a mock up of the documents an equity release provider would have to send him once regulation starts. DE MONT: This is our little table which explains to you what the impact is of rolling up interest and adding it to the loan. So in this particular case in every year you will be paid £1440. What this shows you is, if you started with £15,000, at the end of year ten, it’s gone up to £47,000 outstanding. CURWEN: What do you think Brian? B. MOORE: Frightening isn’t it? It certainly makes you realise what sort of money you’re paying out. DE MONT: The other thing we do here is give you an estimate of what could happen to the value of your home. It’s all very well talking just about the amount you borrow, but of course your house can go up and down as well. MOORE: Of course, yes. DE MONT: So if your home went up in value by 1% every year, it will tell you what it will be worth and you can compare that to the amount outstanding because that’s the comparison you need to make. And of course the other thing you do need to bear in mind, is your house can go down as well as up and this also shows you what would be the impact if your house went down in value by 1% each year and you can equally compare that with how much you’re borrowing and that is sort of like a check if things do go wrong, what might I be in for? B. MOORE: Yes it’s a good comparison, isn’t it? CURWEN: Brian was impressed with the regulator’s plans to improve information and let people know exactly what they were taking on with the mortgage option. But he asked what would the FSA be doing to regulate the other option, reversion plans. DE MONT: At the moment home reversion schemes aren’t within the scope of our regulation. B. MOORE: Why not? DE MONT: What the government have asked us to do is to regulate mortgages and a home reversion scheme isn’t a mortgage. What you do when you take out one of those products is sell part of your home effectively. So it’s not a mortgage, it doesn’t meet the definition, so therefore it is outside what the government’s asked us to do. They have said however, that they are going to consult on bringing home reversion schemes into FSA regulation. CURWEN: Isn’t that going to prove confusing for consumers like Brian because it’s like getting to a fork in the road. If you take the right hand fork with roll-up mortgages, lifetime mortgages, you’re fine, you’re regulated, take the left for home reversions and you’re on your own. DE MONT: I think at the moment it is a bit muddled for consumers. The one thing I would say is when our regime comes in, we can promise you that we will make that better and clearer. CURWEN: The Treasury plans to publish a consultation paper on this in the autumn. But if it does decide the FSA should regulate home reversion schemes as well, that won’t be in place at the same time as the other regulation and the Treasury admitted to “Inside Money” there is a potential for consumers to be confused. Rebecca Fearnley, a principal researcher for Which magazine, has just compiled a report on equity release and she told Brian she’s disturbed by the prospect of such uneven regulation. FEARNLEY: We’re quite concerned about the lack of regulation for the home reversion schemes. I mean we’re pleased that the government has announced its intention to consult about regulating them but obviously that is still going to leave a significant gap because these things tend to move quite slowly, and so it’s of great concern to us because it’s a loophole. People buying these products don’t see the distinction between the two types. So we would like to see the government sort of moving as quickly as possible to get the reversions regulated. CURWEN: What’s the danger if the government doesn’t do that? FEARNLEY: Well there’s the danger of mis-selling, that unscrupulous providers can move into the market place and just sell away without any regard for regulation and people won’t have any redress if they are mis-sold. We have concerns about these products. We think they’re quite inflexible, they’re expensive and they’re quite complex. Most of them have a no-negative-equity guarantee but, you know, if you end up with nothing left out of your whole home, that’s ended up being a very expensive product. CURWEN: They’re expensive Brian. MOORE: Yes, they are expensive and this is a factor that’s beginning to trouble me. CURWEN: But are there any circumstances under which these products are the right, the sensible thing to do for some people? FEARNLEY: We recognise that for some people they don’t have any alternatives. They can’t move somewhere smaller, they haven’t got any savings, haven’t got anywhere else to go but they need money. All we’re saying is really think about it carefully. They are an option of last resort. You know if you’re buying a car or going on holiday, you need to think about it very carefully because you will effectively be paying for that for the rest of your life. CURWEN: Brian Moore had heard a strong warning from Which, proceed with caution. He had a lot to think about. He’d been told that equity release products are complex and expensive. The debt on a roll-up mortgage can double in ten years and with a reversion plan you get far less than the market value for selling part of your home and as we’d heard the regulation of these products isn’t yet in place and will be confusing when it is. But on the other hand, he and Joyce feel they need extra money from somewhere to allow them to enjoy their retirement without penny pinching and they hadn’t spotted any other route to get what they wanted. I asked Brian, will they go ahead with equity release? B. MOORE: Yes and no. Sorry to say that but yes, I think we shall go ahead for one of these products but not yet, not for at least 12 months. CURWEN: Why? B. MOORE: Well for one thing, these equity release products aren’t regulated. In 2004, October, the FSA will regulate one of these products but not the other. So I’ll certainly do nothing until that time. I still think it’s a good idea but the most important thing I’ve learned is not to do anything in haste. I mean I’m talking about one of the most important things in my life, that’s my house, and I certainly don’t want anything to go wrong with that. CURWEN: And if you do go ahead and get one of these products, then have you got a sense of what type of product you would go for? B. MOORE: Yes I think that the most likely product is the draw-down roll-up. CURWEN: Why, what would it allow you to do? B. MOORE: Well it would allow me to draw off small amounts of money or smaller amounts of money and so pay less interest. CURWEN: And that matters? B. MOORE: Well yes I think so. The less interest I have to pay the better because at the end of the day a large amount of my equity is going to be taken up by interest. CURWEN: How much difference do you think it might make to the quality of your life and your wife’s if you went in for equity release? B. MOORE: Well it would make a difference. I mean our lifestyle at the moment is reasonable, we enjoy a lot of things. But at times you have to think, I can’t afford to do that, I’d like to do it but I can’t afford to do it. With extra money from equity release we wouldn’t have to think about that, we could actually do it. CURWEN: It would be using your home like a piggy bank, wouldn’t it really? Does it matter if at the end of the day the money in the piggy bank’s all gone? B. MOORE: I don’t think so. I mean obviously you take a gamble, you take a gamble on how long you’re going to live, how long before you go into long-term care. These are all gambles you have to take if you’re going into one of these schemes. So yea it’s a gamble but I think we’d have to take it. Inside Money: Programme 5: “Sitting on a Fortune"