(Items in red – amend to suit the clients circumstances)
NAME
ADDRESS
XXXXXX
XXXXXX
XXX XXX
DATE
Dear NAME
Following our recent discussions and completion of a Personal Financial Planning Profile on date, I am writing to detail the recommendations which I feel are appropriate to your current circumstances. We agreed that your objective was to XXXXXXXXXXXX.
At the meeting I presented you with my business card, copy of our Client Agreement and our leaflet “key facts about our services”. You also completed and signed a fact find.
The accuracy of the information contained within the Personal Financial Planning Profile is vitally important as it forms the basis for the advice I have given. The products were selected to match your personal circumstances. You have informed me that you have insufficient capital or income to XXXXXXXXX.
Personal circumstances
You are married, in good health and are non smokers.
You live in your own property in WHEREABOUTS, and you estimate its current market value as £XYZ
You are both retired and have net monthly income of approximately £123.
I have taken into account that you have on deposit approximately £000 and your home is free of mortgage debt. You have informed me that although you have £000 available, this fund is allocated for various matters such as renovations to your home and for emergency funds. You require a further £000 to be available in order to make other purchases and to meet expenditure.
I made it clear that by far the best way to raise money on your home, from a purely financial point of view, is to sell the house and move to a smaller, cheaper property. You understood this and have considered this option thoroughly, but find it unacceptable for all sorts of family, emotional and practical reasons.
There are various schemes available and how each scheme works may differ, but most lifetime mortgages share a number of common features.
· A loan is secured on the property or the future value of the property.
· Borrowers retain the right to live in the property for the duration of their life.
· Most homes can be used for security, although there will often be a minimum property value.
· Depending on the scheme, advances of up to XX% may be possible.
· With schemes covered by The Equity Release Council (formerly SHIPS), the property cannot be lost nor can the accumulated debt become larger than the value of the property.
There are different types of lifetime mortgages/home reversion schemes and we discussed the following options.
Home Income Plans
Key features of these plans include the following.
· A loan is taken out on the property, up to XX%.
· The money raised is used to purchase a lifetime annuity.
· Part of the income generated is used to repay interest.
· The debt remains outstanding until death or the sale of the property.
You dismissed this option because
· Relatively low levels of income paid for younger lives.
· Disposable income generated is lower than other forms of equity release.
· Death soon after taking such a scheme out could result in the loss of the annuity.
Shared appreciation mortgages
Key features of these plans include the following.
· A loan is secured on the property.
· The loan is repaid on death or when the property is sold.
· There are no interest payments. Instead the lender takes proportion of the future growth in the property value.
· If prices stagnate or fall the borrower effectively benefits from an interest-free loan.
You did not wish to take this option as you have experienced increases in property values and felt that this was not a cost-effective option.
Home reversion schemes
Key features of these plans include the following.
· Part or the entire home is sold to a reversion company.
· In return an income lump sum or annuity is paid.
· The right to remain in the property until death or the sale of the property.
· No interest charges.
· Some chance to gain from the future appreciation in property value if only part of home is sold, depending on amount.
You did not wish to take this option as you have experienced increases in property values and felt that this was not a cost-effective option.
Roll-up loans
Key features of these plans include the following.
· A loan is secured on the value of the property.
· Instead of making interest payments, these are rolled up thus increasing the amount of the debt. No interest is paid during the life of the mortgage.
· The loan plus interest is repaid out of the property proceeds on death or on sale, if earlier.
· Usually they are arranged on fixed rates of interest.
· Many schemes guarantee that the total debt cannot exceed the property value.
· The value of property available as an inheritance depends on whether house price appreciation exceeds interest costs or vice versa. It is uncertain how much will be paid back.
· Roll-up loans involve paying interest on the interest that has already been added so the amount owed can grow quickly.
This was your preferred option since no repayments of interest are required until death or sale. Furthermore the rolled-up interest may assist with reducing your estate for inheritance tax liabilities.
I therefore looked at the Equity Release offerings of various providers (as appropriate – e.g. including Norwich Union, Legal & General and Hodge Equity Release). The aim of the policy is to provide you with a lump sum payment through a loan secured on your property. You will keep full ownership of the house and can continue to live in it for as long as you wish. We chose ABC Equity Release because they charge a lower interest rate than the others, release money earlier than the others and have a dedicated team who understand all aspects of equity release OR AS MAY BE APPROPRIATE. All of these are members of the Equity release Council (formerly S.H.I.P. - Safe Home Income Plan) which is a voluntary code designed to prevent the scandals which surrounded equity release a decade ago. A copy of that code is enclosed with this letter.
Following your instructions we completed an application for an ABC Equity Release plan, applying for a £XXXXX release. You intend using this sum for expenditure on your property/state other capital and income requirements. ABC have informed me that the interest rate of X.X% (X.X% APR) will apply for applications received by DATE.
You understand that interest is charged on this equity release at X.X% (X.X% APR) and that this will compound. So, for example, five years after taking this advance, the debt against your estate will be £XXXX, which represents an increase of £XXXXX. If we assume that property prices increase by 3% per annum, in five years your property, which Hodge valued at a conservative £XXXXX will be worth £XXXXXX which represents an increase of £XXXXXX. If, however, house prices remain static, then the amount you owe will obviously represent a higher percentage of the property value.
You understand that the growth in property values is not guaranteed and values could fall as well as rise. The cash sum released may affect your current entitlement to state benefits such as Income Support and Council Tax benefits. Any benefits may be reduced or lost altogether.
ABC will charge you a fee of £XXX for a valuation survey. An application fee of £XXX will be taken from the loan amount. As discussed, I would like to confirm that if you were to repay the early there will be a penalty of XXXXX.
It should also be noted, that past performance of property prices should not be taken as a guide to the future and also regional house price variations should also be considered.
As discussed, we have selected a “roll-up” scheme as opposed to a “Reversionary” scheme because XXXXXXXXXXX/the latter are only available from the age of 65 onwards.
We also discussed all of the aspects listed in our Equity Release Client Checklist and you are satisfied that we have covered these points in detail.
We are obliged to inform you that your home is at risk if you do not keep up repayments on a mortgage or any other loan secured in it. However, under the Equity Release Plan, full repayment is not due until you either both die, or move permanently from the property on which the security is based.
We charge an advice fee of £X, as detailed on our Client Agreement. On completion of the plan PROVIDER will pay us a commission of £X – this is documented on page X of the Keyfacts document.
I hope that this letter accurately reflects the contents of our meetings. Should you have any questions, or require any further clarification please do not hesitate to contact me. Assuring you of my personal attention at all times.
Yours sincerely,
Adviser
Please sign, date and return the attached copy as confirmation that you understand the contents of this letter, and that all fees and commissions to be earned have been declared to you.
Signatures...... …………………… Date......
Client