Summer only just seems to have ended, but take a walk around any supermarket and you’ll find aisles stocked with all types of Christmas goodies, from selection boxes to decorations, cakes to presents.
Whilst we are growing immune to Christmas starting three months earlier than it used to, we didn’t expect to see one leading national newspaper, as well as a firm of Independent Financial Advisers, both promoting Equity Release as a way of being able to buy Christmas presents for your loved ones.
In fact, to put it more strongly, we were frankly appalled that such a complex and potentially dangerous product, is being touted as a way of paying for Christmas.
Let us explain…
Releasing equity in your home
Equity Release is one of the ways of accessing the money, or ‘equity’, tied up in your home, either as a lump sum or income. Whilst interest is charged, it is not paid on a monthly basis as is the case with a traditional mortgage, but added to the outstanding debt and repaid in the future when the house is sold, often when the owners of the property die.
Equity Release is only available to people who are at least 55 years old, although because of the effect of compound interest, 55 is generally thought to be too young.
There are a number of circumstances when Equity Release can be very useful:
- Repaying an existing interest only mortgage or other debts
- Helping to provide an income in retirement, if other methods are insufficient
- Helping to meet capital expenditure, for example home improvements, which cannot be paid for in other ways
But using it to help “ease the financial strain of the Christmas period” as the Telegraph put it last weekend? Surely not!
The cleverly disguised advert goes on to say “Enjoy a Merry Christmas and a happy new year without the worry of paying off your credit cards.”
What the article doesn’t point out, other through some generic risk warnings, is that someone using Equity Release to pay for Christmas presents in three months’ time, could still be paying interest on the cost of Christmas 2013 in 30 years’ time.
Assuming a typical interest rate of 6%, our calculations show a debt of £10,000 will leap to a massive £32,071, more than three times the amount borrowed, after 20 years. That’s a very expensive Christmas!
Remember too that legal and arrangement fees of around £1,500 would also have to be paid.
Our view is that Equity Release is a completely unsuitable way of paying for Christmas; we’re not being kill joys, Equity Release in the right hands, at the right time of life, can be useful, but using it to fund an event which comes around each and every year, where interest will roll up to significantly increase the amount you borrowed, is frankly woeful financial planning.
It’s not just us who take this view either.
Annie Shaw, a financial commentator who writes for the Daily Express, said: “Equity Release may have a place in retirement planning in a limited number of circumstances, which may, for some wealthier families, include inheritance tax planning. If the intention of the plan is to help with living expenses then it should be considered only when all other options have been ruled out. It is certainly not to be undertaken lightly.
Annie continues: “Anyone being encouraged to take out Equity Release to treat the family to lavish Christmas presents, take a holiday or to “enjoy the finer things in life”, is being badly advised. Unless they have extremely limited life expectancy or there is no chance of a widowed partner being left to cope in a mortgaged home, they are likely to be storing up problems for the future rather than solving them.”
Meanwhile, retirement expert, Dr Ros Altmann, said: “I must say that I would not feel it appropriate to suggest using Equity Release for funding discretionary spending such as Christmas presents. Equity release products can be an extremely expensive way of borrowing money and the debt will start off small relative to the house value but will rapidly grow and, once you have borrowed against your home, you will limit your options for accessing your housing wealth when you may desperately need money in future.”
Ros continues: “Equity release is a product that can be suitable for those who need to find money to fund essential spending, such as long-term care, significant life events for you or your family or perhaps major maintenance work on your home. To use it for funding discretionary once-a-year items seems like very unwise short-term planning which can have damaging longer-term consequences on your financial health.”
Are you considering Equity Release?
As with all financial products there is a right time, as well as a wrong time, to consider Equity Release. If you would like advice on whether Equity Release is right for you, as well as looking at other, possibly more suitable options, get it touch.
Our financial advisers are experts in retirement planning and will be able to ensure you choose the right solution for your needs.