For asset rich, cash poor property owners a popular form of finance is by using an equity release scheme.
These take various forms and though ultimately quite expensive and poor value for money they can prove an effective means by which the elderly can enjoy their declining years, utilising the value of their home to secure a monthly income.
Many front line insurance companies offer such schemes.
Unfortunately, those living in retirement developments are finding it difficult to obtain an equity release plan, as the value of their properties are falling (especially on Peverel/Firstport managed developments)
As with all forms of finance, there is the prime and sub-prime equity release market.
Possibly one of the schemes that has the potential for financial disaster for a client exists within the sub-prime sector.
For those who do not qualify for a prime equity release scheme, an offer can be made to buy the property at 70% of the value. You can live in the property as long as you live, but on your demise the property reverts to the company.
Here is a likely scenario of how such a scheme could work?
You have a property that is valued at £250,000.
You receive £175,000 and can live in the property until your demise. If you survive 10 years you have an income of £17,500.
So what are the negatives?
In the first place, you are relying on the valuation being correct.
A valuation of £250,000 may seem fair, but what if the true value was £300,000?
A difference of just £50,000 results in an instant bonus for the company of £35,000, since the lower valuation results in a payout of £175,000, the higher valuation £210,000.
If the property has a true value of £300,000, over 10 years it is very likely to increase by 30%. So the property woud have a value of £390,000.
Using this model, it can been seen that a loan of £175,000 over 10 years has the potential to cost the customer £215, 000. That is very poor value for money.
Into the mix, a client is likely to be faced with a largely commission based sales team, practiced in pressure sales techniques, whose priority is to garner commissions, you can see a potential conflict of interest as to what is appropriate for the client and the sales team?
Further into the mix, if you now add Sarah Whitehouse, even Lyn McAllister should see the danger?
