Over-55s considering taking cash out of their home with equity release will now be required to discuss their day-to-day expenses before getting a mortgage.
The Equity Release Council, the industry standards body, has updated its code of conduct to require its member advisers to cover income and expenses as part of the advice process.
It comes as interest rates on pension loans have risen to more than 9 percent in some cases, reflecting broader increases in the cost of mortgage lending across the market.
Get Advice: Those looking at equity release should be questioned now about their day-to-day expenses in retirement
Obtaining advice is a legal requirement when taking out a mortgage with equity.
The majority of equity release lenders, as well as many advisory firms, are members of the Equity Release Council, meaning they agree to adhere to the rules and statement of principles.
Although monthly payments are not required on home equity loans, it is still important for homeowners to consider how borrowing money for their home will affect their finances in retirement.
Equity release can affect eligibility for certain government benefits, as well as what someone will pay for care if they need it. It can also impact the legacy they can leave for their family.
The Equity Release Council said that in many cases income and expenditure had already been discussed during the advice process, but this would formalize the requirement and ensure it is ‘consistently met’.
The updated code also provides more protection for borrowers with mandatory repayment on lifetime mortgages, where homeowners agree to make repayments until they reach a certain age. The changes will come into effect from March.
Equity release loans, also called lifetime mortgages, give homeowners over the age of 55 a tax-free loan worth up to 60 percent of their home’s value while still remaining the sole owner.
It only needs to be repaid when the last borrower dies or goes into long-term care, and is usually settled through the sale of the house or from the wider estate.
This means that the borrower’s income and expenses are not assessed in the same way as if they were applying for a standard repayment mortgage.
Each month, the interest on the outstanding balance is added and added to the total loan amount so that it increases over time.
Although monthly payments are not usually required, some plans offer borrowers the option to pay them off voluntarily to keep the interest they owe low.
For those who plan to make regular payments during retirement, discussing income and expenses would be even more important.
The council will undertake a wider review of its standards later this year.
Michelle Highman, chair of the Equity Release Council’s standards committee, said: ‘The Council’s standards have been vital to the development of a vibrant market, but it is important that we review them regularly and consider how we can best serve customers. can serve and support innovation. within this sector.
‘The Council will therefore conduct a thorough evaluation in 2024 with input from members, stakeholders and other interested parties.
“The evolution of our standards is critical to helping the market continue to grow and ensuring that the diverse customers who choose to access their home equity can do so with confidence.”
Retirement Fund: Equity release loans provide homeowners over the age of 55 with a tax-free loan worth up to 60% of their home’s value, while still remaining the sole owner
Andrew Morris, senior equity release advisor at Age Partnership+, added: ‘While most equity release plans are not assessed for affordability, at Age Partnership we have long believed that a robust conversation around income and expenditure is vital.
‘By discussing income and expenses, customers can see whether equity release is the right choice for them, and if so, they can ensure the borrowing level is appropriate.
‘In addition to their current situation, it is important to also look at their future income and expenses. This future planning helps to identify any future needs.
‘For example, consider what would happen if a customer stopped working, or, for joint parties, what the financial situation would be if one were to die.’
‘If there is sufficient income, a personal loan, a regular mortgage or an interest-only mortgage may be a better option.’
What happens to the stock release rates?
Equity release rates have risen over the past year, along with mainstream mortgages, meaning borrowers entering plans today are paying more in interest than they would have been before 2022.
Interest rates on equity release products are higher than those on regular mortgages and are currently between 6.5 and 9 percent.
You can research the costs of equity release plans and interest rates using This is Money and Age Partnership+’s comparison tool.
When you browse the interest rates, the APR shows the annual cost of borrowing including the additional costs, and the AER (annual equivalent rate) shows the total cost of borrowing as the interest rate increases each year.
It is wise to choose a plan where the interest rate is fixed for the term of the loan. This gives you certainty about the amount you owe.
If the interest rate on a loan is variable, make sure it has a cap and that you can afford that increased amount.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow a commercial relationship to compromise our editorial independence.