THIS DOCUMENT IS PRODUCED FOR GUIDANCE PURPOSES ONLY
Explanatory notes
Blue Text – Free format personalised customer information – to be adapted/deleted to fit each individual customer’s circumstances. Red Text – Compliance guidance – to be deleted before issuing letter to the customer. Only the paragraphs/sentences that are applicable/relevant for each individual customer should be used. All text that is not applicable/relevant should be deleted before issuing the letter to the customer.
Template and example paragraphs
Day Month Year
Name Address Postcode
Dear
Further to our meetings on:
(DATE) at (LOCATION)
I am now writing to formally confirm the contents of our discussions. I have explained all the areas outlined in the Initial/Combined Disclosure Document and enclose a further copy of your Mortgage Illustration provided initially on (DATE). This illustration was valid at the date of issue and as such we can provide an updated version if you so require. I have also provided you with a copy of the Financial Conduct Authority’s Money Advice Service guide entitled “Equity Release Schemes”.
We completed a confidential fact find in order to establish your needs and current circumstances and I explained the various options available to you.
I confirmed that I would provide you with advice and recommendation. I operate from a limited panel of providers and will advise you on the most suitable product in this range.
My recommendation is based on the key issues arising from the confidential fact find. The key issues identified are summarised as follows:
You are currently aged complete age(s) You are currently in good health (if they are not please detail their health situation). Your current household income is £X per month (in addition to the total you may wish to breakdown the amounts if received from a number of sources) Your current average outgoings total approximately £X per month Your property is currently occupied by [ADD NAMES] (detail who currently resides in the property – especially important if there are any relatives or lodgers living with the borrower).
We discussed your reasons for wanting to release equity from your home and these are detailed below.
You wish to raise £X. lump sum/per annum (delete as appropriate)
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 This is for (detail exactly what the customer wishes to raise –If the total amount is not required immediately a drawdown facility should be arranged as customers should not be borrowing to put into a savings account for a ‘rainy day’. If the funds released are to cover existing debts please detail these – it is prudent to have received settlement figures prior to your recommendation).
Equity Release schemes
Equity Release schemes are designed for older homeowners who have already paid off their mortgage or have a very small mortgage outstanding. These homeowners may be short of disposable income but, due to rising house prices over the years, find themselves owning a highly valuable property. Equity Release schemes are designed to unlock some or all of this equity and turn it into a tax-free lump sum or regular payments, or in some cases, a mixture of both.
There are two different types of equity release product and I explained fully the differences between both options:
Lifetime Mortgages
Take out a loan that is secured on your home, usually between 20 and 50 per cent. The older you are the higher percentage you will be eligible to borrow. Continue to own your own home, although you will have to pay back the mortgage on it. Interest on the mortgage is added to the mortgage account on a regular basis and “rolled up” over the mortgage term. The original mortgage amount plus the accrued, rolled up interest, is repaid from the proceeds of the sale of your home when you die, or if you move out of it (perhaps into a care home).
Some Lifetime Mortgage schemes will permit interest payments to be made, subject to affordability. This will alleviate the effect of the “rolling up” of interest and the impact which this has on the equity in the property. It is still assumed that you will repay the capital amount when the property is sold, either when you (or the second of you, if a joint application) die or go into long term care. If you have other intentions regarding the repayment of the capital you should discuss these with your adviser prior to submitting an application.
The majority of Lifetime Mortgages also come with a 'no negative equity' guarantee. This means that if you live longer than expected, or even if house prices go down, the amount owed will never exceed the open market value of your home when it comes to be sold.
Home reversion plans
Sell all or part of your home to a reversion company. No longer own your own home, but continue to live there as a tenant of the reversion company. The home is sold when you die, or if you move out of it (perhaps into a care home).
A Home Reversion plan is a sale and not a loan, therefore there is no interest to pay. Instead, the Home Reversion provider will pay less for the relevant proportion of your home than it would be worth on the open market. Typically you will receive between 35% and 60% of its market value depending on your age. So, for instance, if you sold 50% of a £200,000 property you could receive between £35,000 and £60,000 rather than £100,000.
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 Other options
We discussed various alternatives to releasing equity from your home; these were discounted for the following reasons:
Utilising other funds (Please provide full details of why this option was discounted, for example where applicable savings and investments etc are available) Disposing of other available assets (Please provide full details of why where applicable this option was discounted) Downsizing to a less expensive property – (Please provide details of why where applicable this option was discounted) Receiving financial assistance from family or friends (if available) – (Please provide details of why where applicable this option was discounted) Selling the property to a family member or dependent (Please provide details of why where applicable this option was discounted) Taking up employment – (Please provide details of why this option was discounted) Letting part of your property – (Please provide details of why this option was discounted) Utilising additional state benefits which are unclaimed at present (Please provide details of why where applicable this option was discounted) Home Improvement grant from local government (Please provide details of why where eligible this option was discounted) Ordinary mortgage considered - (If the fact find established that the customer has positive net disposable income, which is likely to be sustained for the foreseeable future and which may be sufficient to cover the cost of an ordinary mortgage, you should consider an ordinary mortgage and give details why a lifetime mortgage was considered more suitable for the customer) Other - (where applicable, please provide details of why any other options were discounted)
Inviting a relative or friend
EITHER I asked if you would feel more comfortable inviting a relative or friend to accompany you during my presentation. You accepted my suggestion and were accompanied by [INSERT NAME OF ACCOMPANYING PERSON/S]. OR During our initial discussions, I asked if you would feel more comfortable inviting a relative or friend to accompany you during my presentation. However, you did not wish to do this because [INSERT REASON].
State of health YOU SHOULD CONSIDER THE CUSTOMER’S HEALTH AND LIFE EXPECTANCY BEFORE RECOMMENDING AN EQUITY RELEASE PLAN.
Insert the following paragraph if the state of health is declared as good. State of health – good We have discussed your state of health and how this may affect your life expectancy or your ability to remain in your home, and therefore the risks of the plan coming to an end earlier than anticipated. This point is very important because ending the Equity Release plan earlier than normally anticipated for someone of your age would mean that the cash payment you
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 receive now will be poor value compared to the equity in your property you have given up. This would be particularly so, and the adverse consequences more severe, if the plan ended after only a relatively short period of time.
We did not identify any health-related issues that may question the suitability of the Lifetime Mortgage, but as nothing is certain about such matters you understood and accepted the risks relating to this issue.
Insert the following paragraph if the state of health is declared as not good. State of health – not good We have discussed your state of health and how this may affect your life expectancy or your ability to remain in your home, and therefore the risks of the plan coming to an end earlier than anticipated. This point is very important because ending the Equity Release plan earlier than normally anticipated for someone of your age would mean that the cash payment you receive now will be poor value compared to the equity in your property you have given up. This would be particularly so, and the adverse consequences more severe, if the plan ended after only a relatively short period of time.
You told me that [INSERT DETAILS OF HEALTH ISSUE]. Despite the increased risks I still felt that an Equity Release plan is suitable for you because [INSERT REASON, THIS SHOULD ALSO INCLUDE WHERE APPLICABLE DETAILS OF ANY ENHANCED TERMS OBTAINED AS A RESULT OF THE CUSTOMERS STATE OF HEALTH]. You understood and accepted the increased risks relating to this issue but still wished to proceed in order to meet your objectives.
Tax and benefits
We have discussed that releasing equity from your home can have implications for any Tax Benefits you may be currently receiving/entitled to (delete as appropriate). Assessing these areas can often be a complex process therefore I have accessed a specialist Benefits report that carries out a full assessment on the following areas:
Benefits entitlement Tax allowances Local authority grants The effect of equity release schemes on means-tested benefits
The Benefits report adopts an all round approach to help to ensure that your benefit income is maximised. The report offers a graphical representation clearly displaying capital, gross and net income, elements of income, and the effect of income and capital rules and entitlement to benefits and pension credits.
Based on the Benefits report I have concluded that it is acceptable to proceed with my recommendation. This recommendation may affect some of your existing benefits and where this is the case I will point it out to you [INCLUDE RELEVANT DETAILS WHERE APPLICABLE].
The Benefits report will be explained to you; please find enclosed a copy of the report with this letter. (Include a copy of the Benefits report with this letter)
Recommendation
Regulated Lifetime Mortgages and Home Reversions were both discussed, and I explained fully the differences between the two. We agreed that a Lifetime Mortgage is more suitable for you than a Home Reversion plan because [INSERT REASON].
In our meeting we identified that you had the following needs [THIS SECTION OF THE SUITABILITY LETTER MUST CLEARLY DEFINE THE CUSTOMER’S OBJECTIVES FOR THE MONEY
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 RAISED. IT SHOULD GIVE A PRECISE BREAKDOWN TO QUANTIFY AND SPECIFY THE USE OF THE CASH, INCLUDING IF NECESSARY, ANY MONEY RAISED TO COVER THE SET UP COSTS]
We discussed the option of a Lifetime Mortgage under which you make interest payments. I have established that your current level of income would/ would not be sufficient to allow you to make interest payments to your proposed mortgage.
Making interest payments would mean that interest would not be “rolled up” and thus reduce the impact of this on the equity in your property. You have decided that you DO/ DO NOT wish to make such payments because:
(Need to cover reasons behind client decision in either case – if opting to make payments, explanation should include the following How much the monthly payment will be What happens if circumstances change, eg o Is there likely to be a reduction in the pension, benefits or other income paid to the applicants during the life of the loan? o If one partner passes away, how will that affect the survivor’s income? o Are there any situations where benefits that are being paid could reduce or cease? o Does the client have other outgoings which may possibly increase over time and thereby put pressure on ability to make payments? What happens if payments fail to be made The terms of the scheme recommended, ie. Whether the mortgage be switched onto a “roll up” basis at a later date and the terms under which this can be done If someone other than the applicants is making the payments this needs to be evidenced and a full mortgage process followed – they also need to be made fully aware of the implications of failing to make such payments)
Provider justification
I have access to a limited panel of Equity Release providers offering Lifetime Mortgages and Home Reversion plans. I have researched this panel and have chosen [INSERT PROVIDER NAME]. I recommended this provider because [ENTER REASON FOR PROVIDER RECOMMENDATION, INSERT REASONS E.G. INHERITANCE PROTECTION GUARANTEE, PROTECTED EQUITY, FLEXIBLE CASH RELEASE, OPTIONS TO STOP AND START INTEREST ONLY PAYMENTS, ESCALATING INCOME PAYMENTS, HOUSE PRICE INFLATION PROTECTION. IF USING AN OFF PANEL LENDER YOU SHOULD FOLLOW PINK’S OFF PANEL PROCESS]
In addition the provider selected offers a “no negative equity guarantee”. This means that you or your beneficiaries will never have to repay more than the value of your home. It also means that the provider, not you, carries the risk of negative equity.
[PROVIDER NAME] ... is a member of the Equity Release Council
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 The Equity Release Council
The Equity Release Council came about through an expansion of the remit of SHIP, formerly Safe Home Income Plans, which was launched in 1991 in direct response to the growing need for consumer protection and information in the equity release sector. SHIP represented equity release providers and worked closely with the wider equity release sector; setting standards for good practice and ensuring that all its members gave a number of defined consumer protection guarantees, including a no negative equity guarantee.
SHIP, however, did not bring together the whole sector into one unified body to include other stakeholders such as advisers and solicitors. The aim of the Equity Release Council was to expand SHIP’s remit and represent all stakeholders in this market, providing a voice for the sector as well as setting standards which protect and reassure consumers.
The Equity Release Council incorporates SHIP’s standards and continues SHIP’s aims of protecting equity release customers, working to increase and improve safeguards across all parts of the industry. All members must abide by a set of principles through the Code of Conduct.
In addition, your chosen solicitor, who will oversee this transaction on your behalf, must sign a certificate to acknowledge that the essential features and implications of your chosen plan have been brought to your attention. No equity release plan provided by a member of the Equity Release Council can proceed without a signed certificate.
For more information and a full Customer Information brochure go to the Equity Release Council website at www.equityreleasecouncil.com, or speak with your adviser.
Illustration and product literature
Further details are contained in the illustration and product literature. It is important that you read thoroughly the Lifetime Mortgage, Mortgage Illustration, the terms and conditions booklet and any other product literature provided to you on to ensure that you fully understand the plan, the charges and fees applicable. Please pay particular attention to the section of the Illustration headed “Risks – important things you must consider”. If you are unsure on any points please contact me.
Your benefits include the following:
Income £ (confirm amount if applicable) Lump sum £ (confirm amount if applicable) Both income and lump sum £ (confirm amount if applicable) Drawdown option £ (confirm amount if applicable)
Interest rate options We have discussed the various types of interest rate options available and we agreed that a [INSERT RATE TYPE SELECTED] is more suitable for you because [INSERT REASON]. The actual interest rate at outset is contained in your Mortgage Illustration.
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 Monthly repayments
OPTION 1 With the plan I have recommended, there are no monthly repayments as interest is rolled up and added to the loan.
OPTION 2 With the plan I have recommended you will need to make monthly payments of £X. We agreed that you could afford to make these payments from your existing income. [INCLUDE DETAILS OF WHAT WOULD HAPPEN IF CLIENT COULD NO LONGER AFFORD TO MAKE PAYMENTS].
OPTION 3 [IF THE LIFETIME MORTGAGE PERMITS THE CUSTOMERS TO BEGIN AND CEASE MONTHLY PAYMENTS DURING THE TERM, A COMBINATION OF THE ABOVE 2 OPTIONS].
Early repayment charges
This plan may contain early repayment charges. Please refer to your Mortgage Illustration for details as to the level of charges and when they could apply.
Your attention is drawn to these important points:
The lifetime mortgage is designed to last for the rest of your life and is not suitable for short term financing. Should the property value fall short of the Lifetime plan minimum (as explained to you) when valued by an independent valuer, the application will not proceed and the valuation fee will not be refunded. The independent valuer’s decision regarding the actual value of the property is final and not usually open to appeal. Where the valuer identifies essential repairs are needed to the property, the purchase of the property will not go ahead until these repairs have been completed to the valuers satisfaction. If the property needs to be re-inspected you will have to pay a re- inspection fee. You must maintain the property along with any ground rent or service charges that may be payable. Your property must be fully insured at the level recommended by the valuer and this must be kept up to date. In the event that the property is destroyed, it must either be reconstructed or the lifetime mortgage must be repaid. It may be possible that you could apply for a further cash payment at any time provided all of the property has not already been sold, and subject to the plan provider’s then criteria together with the payment of any fees and other costs. You must contact the plan provider for approval if you want someone else to move into it. Cancellation - you can change your mind at any time up until you are legally bound to proceed with the sale. Any legal and valuation fees will still be payable. You are usually able to move property at any time, but you must inform the provider first. The lifetime mortgage may be moved to the new property, only if it meets their lending criteria. I have explained the implications of moving to a higher or lower valued property and I have also explained the situation that may arise, should there be a change in ownership of your property.
Changes in your circumstances
The scheme would come to an end following the deaths of all persons named on the plan, and the house would probably have to be sold. This same would apply in the event of all plan holders moving out of the property (for example to move into a long term care home).
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 If a family member or friend moves in to provide companionship or care, they do not retain a right to reside in the property after your death and that of any other person named on the Lifetime Mortgage.
If the plan is originally set up in a sole name, it may be possible to transfer the scheme into joint names, but only if your spouse or partner meets the provider’s age requirements.
You understood and accepted that on your death, or if you leave your property permanently due to, for example, the need for long-term care, the loan plus any accrued interest will have to be repaid. Your home will usually need to be sold at this time to make this repayment. The provider will receive repayment of the loan plus any rolled up interest and your estate will receive the balance of the equity remaining from the sale proceeds. Taking out this plan will reduce the inheritance you pass on to your beneficiaries.
You are able to move property at any time, but you must inform the Lifetime Mortgage provider first. I have explained the implications of moving to a higher or lower valued property and I have also explained the situation that may arise, should there be a change in ownership of your property.
In the event of divorce you should be aware that your Lifetime Mortgage might no longer be able to continue in its original format. The plan benefits may cease or be amended in accordance with the plan providers terms and conditions.
Emergency fund/Future needs
WHERE ANY AMOUNT IS RAISED TO PROVIDE AN EMERGENCY FUND AND/OR TO BE PLACED ON DEPOSIT TO COVER FUTURE PLANNED EXPENDITURE, THE CUSTOMER MUST BE ADVISED THAT HOLDING FUNDS ON DEPOSIT MAY REPRESENT POOR VALUE. Your objectives include raising money to provide an emergency fund/future needs (delete as appropriate) therefore I have recommended that you place this in a deposit account of your choice.
I have explained to you that holding funds on deposit over the longer term may represent poor value for money. Whilst you require access to these funds you should be aware of the implications of leaving money on deposit over the longer term. It is likely that the future value of any potential legacy to your beneficiaries will be eroded by inflation.
Portability
Equity Release Council members guarantee portability. This means that you can move property without financial penalty. Some administrative costs are usually charged to you when this occurs. The property that you are intending to move to must meet the initial suitability requirements.
Please refer to the provider’s Key Features Illustration and terms and conditions for full details.
Independent legal advice
EITHER We have discussed at our previous meetings that it is important to take out independent legal advice when releasing equity from your home. I understand you have done this through Insert Solicitors Name and are happy to continue with the transaction.
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 This Lifetime Mortgage plan will affect the residual value of your estate on death and the amount that could be passed on to your beneficiaries. We strongly recommend that you take advice to ensure that your wishes for your beneficiaries and dependants are taken into account. This may involve making or updating a will, leaving bequests or making lifetime gifts. OR I understand you have yet to take any independent legal advice and I strongly recommend that you do so prior to completing the application process. Please find enclosed details of two independent solicitors that you may wish to consider using for this transaction:
(Add details of two independent legal representatives) Solicitor 1 Solicitor 2
This Lifetime Mortgage will affect the residual value of your estate on death and the amount that could be passed on to your beneficiaries. We strongly recommend that you take advice to ensure that your wishes for your beneficiaries and dependants are taken into account. This may involve making or updating a will, leaving bequests or making lifetime gifts.
Inheritance tax
A growing proportion of the population is affected by Inheritance Tax (IHT). You may be liable to IHT if your estate is worth more than £325,000 (2015/2016 tax year). The value of your estate includes your property, your car, your savings, the proceeds of any life assurance/pension policies owned by you and certain gifts you may have made before your death.
However, the Government announced changes in the Summer 2015 Budget that could mean changes relating to your circumstances in what is a complex taxation area i.e. an additional nil-rate band.
It is therefore advisable that you seek specialist financial advice in order to fully understand all of the implications that releasing equity from your home may have.
Broker fees and procuration fees
As discussed I (have/will/have not/will not) (charged/be charging) a fee for this service, (this will be payable enter when due/this has already been received). For full details of fees payable and the circumstances in which a refund would be applicable, please refer to section 4 of the “Key facts about our services” document.
Pink Home Loans will also receive a fee of £(enter fee) for arranging this lifetime mortgage; a percentage of this amount will be paid to me following completion.
Addition of Charges
I have advised you of the fees and charges involved in your mortgage application. You have confirmed that you (wish/ do not wish) to add the (insert fee(s) and amounts) to the loan amount.
Either
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 If you choose to add fees to your borrowing, you should be aware that in doing this, the long term cost effects are that you will pay interest on the additional amount of lending and that spread over the term, the amount of the fee(s) will be more. or If you choose to not to add fees to your borrowing, these will not be potentially “rolled up” into your mortgage account, thus costing you less than if they had been added to your loan. They may not, however, be refundable if paid at application stage – please see your Mortgage Illustration for full details.
Mortgage or other loans outstanding
YOU SHOULD CONSIDER THE SUITABILITY OF REDEEMING AN EXISTING MORTGAGE, BEFORE PROCEEDING WITH USING A LIFETIME MORTGAGE TO REPAY ANY SUCH DEBTS. YOU SHOULD TAKE INTO ACCOUNT SUCH THINGS AS ANY EARLY REPAYMENT CHARGES ON THE EXISTING LOAN. WHERE THE CUSTOMER IS HAVING DIFFICULTIES IN PAYING THE EXISTING MORTGAGE YOU SHOULD CONSIDER WHETHER THERE MAY BE DIFFERENT OPTIONS AVAILABLE TO THE CUSTOMER, SUCH AS NEGOTIATION WITH THE EXISTING LENDER. YOU MUST ALSO CONSIDER THE DIFFERENCE BETWEEN THE DEFINED COST OF A NON-LIFETIME MORTGAGE AND THE UNKNOWN ‘COST’ OF A LIFETIME MORTGAGE.
THE REASON WHY THE BENEFITS OF THE LIFETIME MORTGAGE PLAN OUTWEIGH THE COSTS OF THE EXISTING MORTGAGE OR LOAN REDEMPTION MUST BE STATED BELOW AND THIS MAY AFFECT THE OVERALL SUITABILITY OF A LIFETIME MORTGAGE. CAREFUL CONSIDERATION SHOULD ALSO BE GIVEN TO REPAYING ANY LOANS.
Mortgage/Secured Loan – No Redemption Penalty Insert the following paragraphs for customers who have a loan/mortgage secured on the property, where there is NO REDEMPTION PENALTY on the loan. You have confirmed that you have an existing loan/or existing loans (Delete as appropriate), secured against your property and I have explained that these borrowings must be repaid on or before taking out this Lifetime Mortgage. We have established that your current lender(s) will not apply early repayment charges.
I have considered the monthly and overall cost of repayment and the remaining terms of any such loans and I believe that using a Lifetime Mortgage to repay them is beneficial for you because [INSERT REASON].
Mortgage/Secured Loan – With Redemption Penalty Insert the following paragraphs for customers who have a loan/mortgage secured on the property, where there IS A REDEMPTION PENALTY on the loan. You have confirmed that you have an existing loan/or existing loans (Delete as appropriate), secured against your property and I have explained that these borrowings must be repaid on or before taking out this Lifetime Mortgage. We have established that your current lender will impose an early repayment charge, but this has been fully discussed and you still wish to proceed.
I have considered the monthly and overall cost of repayment, early repayment charges and the remaining terms of any such loans and I believe that using a Lifetime Mortgage to repay them is beneficial for you because [INSERT REASON].
Existing unsecured loan EITHER. You do not have any existing unsecured loans. OR
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 You have existing unsecured loan(s) and it is your intention to continue with these until the end of their term.
OR As you have an existing unsecured loan(s), which you intend to repay out of the money you receive from the Lifetime Mortgage, I have explained that you are not obliged to do this to qualify for this Lifetime Mortgage and you should give careful consideration to this action. This is because although there are no monthly repayments, a Lifetime Mortgage is a lifetime commitment and may therefore extend beyond the original term of the loan and the overall ‘cost’ of the Lifetime Mortgage may be higher than the loan interest. However, I have considered the monthly and overall cost of repayment, any early repayment charges and the remaining terms of any such loans and I believe that, in your case, using a Lifetime Mortgage to repay them is beneficial because [INSERT REASON].
Existing mortgage related investment provision statements
EITHER You do not have any existing mortgage related investment policies. OR You have existing mortgage related investment policies and it is your intention to surrender them once your existing mortgage has been repaid. I have explained the drawbacks of surrendering existing investment policies and I have not recommended that you do so. OR You have existing mortgage related investment policies and it is your intention to maintain any contracts currently in force.
Income tax
The equity you release as a lump sum will be tax-free but any income raised through an annuity-based scheme may increase the amount of income tax you have to pay. Please refer to your key features document for further details.
Further meeting
I will discuss the contents of this letter with you at our next meeting, which is scheduled for…..(enter date) / which I will arrange with you shortly.
I look forward to seeing you then.
Yours sincerely
Name Title Company Name
Client Name: ______Client Name: ______
Signature: ______Signature: ______
Date: ______Date: ______
WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016 WEB038 Lifetime Mortgage Suitability Letter version 8 – March 2016