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LeeT

Equity Iq

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I've not seen an Equity IQ article posted on here yet. I heard an article about this on Money Box on Radio 4.

There's a thread on moneysavingexpert about it which provides the best explanation I can find. I can't find EquityIQ's web site.

It promises a risk free 2.5% return on the value of mortgage free property.

Here's what MSE poster Penfold12 says about it using an example £400k property.

First of all it is NOT equity release. You do not sell anyone a share in your property. Effectively what you are doing is allowing the insurance companies to use a percentage of your asset for their accounting procedures. Currently the insurance companies involved are Aviva, and Prudential.

The process is very simple;

£400,000 property mortgage free.

50% equitable charge of the property is signed over, and placed into escrow. (£200,000)

The escrow then pays you 5% of the charge value monthly in arrears for 3 years. (£10,000). Be aware that this additonal income is subject to tax!

Why is this done?

There are new accounting rules coming into force in 2012, issued by the European Union. This is more commonly known as 'Solvency 2'.

Solvency 2 basically ensures that for every £1 Million worth of business that an insurance company write, they must show that they have an asset base of £125,000.

The insurance company use the escrow value as an asset for this specific purpose.

Why does the insurance industry do this?

It's quite simply the cheapest way for them to carry this out. Think along the following lines;

They use £1million pounds worth of charge, to write £8 million pounds worth of new business. They pay 5% for using the charge (£50,000.), and earn 5% on the £8 million on the new business they are writing (£400,000). They've grossed £350,000. This is more commonly known as gearing, in financial circles.

Basically, you are a bank to the insurance company!

What are the risks involved?

Put bluntly, for the property owner, none whatsoever.

The charge is placed in escrow, and is heavily weighted in the property owners favour. The trustees of the account are not allowed to raise funds against the charges, or sell the charges on to anyone, and the account value is insured against loss, by the trustees. The cost of insuring the account is borne by the insurance company leasing the tranche.

The insurance company that leases the tranche has to make its payments monthly in advance. If it fails to make a payment on time, or gives notice that it is unable to do so, (ie they go bust) the tranche is unpacked and the charges are released automatically.

Even if you start to feel uncomfortable with it all, you can simply give same day notice, pay three months worth of income back, and if your solicitor is very good, you can have your charge released the same day.

The length of term is 3 years. You can renew if you want, or simply walk away.

You can end the contract term early, if you sell the house or die. If you sell the house, you need to give 3 months notice, or lose three months payments. There is a similar exit clause if you pass away.

Costs Involved

All costs are borne by the insurance company, however for peace of mind, I would expect the property owner to have contract examined by their own solicitors for confirmation, and peace of mind. That would be the only cost to the property owner.

The product itself, is very new, and is governed in the same way as a buy to let mortgage, ie the product itself is unregulated, however the process involved is regulated by the FSA, and must be carried out by an independent financial advisor.(This paragraph boldened by LeeT)

It doesnt cost anything to find out about it, and apart from the property owner's costs from independent examination of the contracts, it is a win win situation.

Hope this helps to clarify things. If you need more information about any aspect, I am quite happy to answer them for you.

The plan launches on the 1st September, and pre signed clients will be receiving their paperwork for examination. I am sure the murky waters will become clearer next week.

If it sounds too good to be true and all that. Anybody reckon the taxpayer will end up bailing out greedy home owners when these blow up?

Can Insurance Co's really seriously underwrite business against assets that evaporate with the turn of an Escrow key when the shit hits the fan?

Edited by LeeT

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I've not seen an Equity IQ article posted on here yet. I heard an article about this on Money Box on Radio 4.

There's a thread on moneysavingexpert about it which provides the best explanation I can find. I can't find EquityIQ's web site.

It promises a risk free 2.5% return on the value of mortgage free property.

Here's what MSE poster Penfold12 says about it using an example £400k property.

If it sounds too good to be true and all that. Anybody reckon the taxpayer will end up bailing out greedy home owners when these blow up?

Can Insurance Co's really seriously underwrite business against assets that evaporate with the turn of an Escrow key when the shit hits the fan?

Didn't Money Box give this a very wary reception?

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I've not seen an Equity IQ article posted on here yet. I heard an article about this on Money Box on Radio 4.

There's a thread on moneysavingexpert about it which provides the best explanation I can find. I can't find EquityIQ's web site.

It promises a risk free 2.5% return on the value of mortgage free property.

Here's what MSE poster Penfold12 says about it using an example £400k property.

If it sounds too good to be true and all that. Anybody reckon the taxpayer will end up bailing out greedy home owners when these blow up?

Can Insurance Co's really seriously underwrite business against assets that evaporate with the turn of an Escrow key when the shit hits the fan?

So I can buy a house with my cash and get 2.5% risk free?

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So I can buy a house with my cash and get 2.5% risk free?

And presumably rent it out too for even greater yield and according to Merv some Penfold chap there are no snags. What could possibly go wrong?

Its like... Why the ****** do I bother any more?

Edited by daiking

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These kind of financing transactions aren't valid unless the capital is loss absorbing (FSA is actually in the process of changing the rules on this).

Section 5:

http://www.fsa.gov.uk/pubs/cp/cp10_10.pdf

What's interesting is the opportunity to partake in this kind of thing as a retail punter - basically you are providing a very remote (I assume) guarantee to the insurer. This is actually not a bad play, provided you are young enough to recover if the worst case happens...

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These kind of financing transactions aren't valid unless the capital is loss absorbing (FSA is actually in the process of changing the rules on this).

Section 5:

http://www.fsa.gov.u.../cp/cp10_10.pdf

What's interesting is the opportunity to partake in this kind of thing as a retail punter - basically you are providing a very remote (I assume) guarantee to the insurer. This is actually not a bad play, provided you are young enough to recover if the worst case happens...

So illiquid assets, borrowed on a short term basis, are capital now? Your house can count as collateral for a mortgage company and an insurance company at the same time?

Who the hell writes these rules?

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This looks like a way for the insurers to raise regulatory capital. Because capital is extremely subordinate (i.e. it's equity in the business or very low priority debt), it is very expensive to raise. Either it has to be issued in the form of new equity (dilution) or as debt at very high rates (currently around 8-9% per annum, fixed for life - that's a big drop over the last few years. Barclays raised new capital a couple of years ago, paying 14% per annum, fixed for life).

Essentially, you are gifting them your equity, and they are then paying you interest on the equity. Because of the short-term contract (3 years) you don't get as high a rate. Because you are placing your property at extreme risk, you are then having to acquire a CDS from another insurer that will allow you to buy back your property, if the insurer you are gifting it to goes bust. That takes another slice off your income. Then you've got your IFA who takes another big cut (in this case, it's a very generous cut indeed - 1% per year - or slightly less than half of what you yourself get).

So, in effect you are putting your property at extreme risk, but using a CDS to protect yourself. All well and good, if you trust the CDS to protect you adequately - which it probably will, unless we get another financial crisis - and even if we do, it's likely that there will just be another government bailout.

Personally, I'd still be sceptical, as this doesn't seem protected against a 'systemic collapse'. The risks are not fully known, and your income is very low, given the underlying mechanism (partly because there are a lot of very, very greedy parasites siphoning off money at every stage in this complex process).

Finally, the whole scheme smacks of a rather obvious loophole. As the 'Solvency 2' scheme isn't remotely finalised - I wouldn't be the least bit surprised to see this loophole closed before the scheme goes live.

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So illiquid assets, borrowed on a short term basis, are capital now? Your house can count as collateral for a mortgage company and an insurance company at the same time?

Who the hell writes these rules?

The house has to be mortgage free, apparently.

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This looks like a way for the insurers to raise regulatory capital. Because capital is extremely subordinate (i.e. it's equity in the business or very low priority debt), it is very expensive to raise. Either it has to be issued in the form of new equity (dilution) or as debt at very high rates (currently around 8-9% per annum, fixed for life - that's a big drop over the last few years. Barclays raised new capital a couple of years ago, paying 14% per annum, fixed for life).

Essentially, you are gifting them your equity, and they are then paying you interest on the equity. Because of the short-term contract (3 years) you don't get as high a rate. Because you are placing your property at extreme risk, you are then having to acquire a CDS from another insurer that will allow you to buy back your property, if the insurer you are gifting it to goes bust. That takes another slice off your income. Then you've got your IFA who takes another big cut (in this case, it's a very generous cut indeed - 1% per year - or slightly less than half of what you yourself get).

So, in effect you are putting your property at extreme risk, but using a CDS to protect yourself. All well and good, if you trust the CDS to protect you adequately - which it probably will, unless we get another financial crisis - and even if we do, it's likely that there will just be another government bailout.

Personally, I'd still be sceptical, as this doesn't seem protected against a 'systemic collapse'. The risks are not fully known, and your income is very low, given the underlying mechanism (partly because there are a lot of very, very greedy parasites siphoning off money at every stage in this complex process).

Finally, the whole scheme smacks of a rather obvious loophole. As the 'Solvency 2' scheme isn't remotely finalised - I wouldn't be the least bit surprised to see this loophole closed before the scheme goes live.

I'd be pretty shocked if insurance companies were able to get away with this, to be honest. Forget the risks to the individual, I don't see how it protects the insurance companies.

The main problem, is that the 'capital' is hopelessly illiquid.

To make matters worse, if you allow this to be sold to retail investors, and the whole enterprise becomes subject to epic political risk. The first house to 'absorb losses' will start a cascade of mis-selling claims, legal challenges and government bailouts. After all, who is it with capital in their houses? Little old ladies.

For the investors, its sounds a lot like being a Lloyds name, but with less upside. That worked out well didn't it?

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Don't do it anyone!

What sort of assets are the assurers holding? Did they pack their balance sheets up to the ginnels with high yielding MBS?

What promises have they made (e.g. Equitable's 3% pa promise that bust them).

Do they speculate on their own account (hint: yes to boost returns) and what have they speculated on?

This has all the hallmarks of asbestos and Lloyds of London. If you don't know about that, Google it.

DO NOT TOUCH IT WITH A BARGEPOLE.

Good advice. It looks like this turns you into the equivalent of a Lloyd's name.

It looks and feels pretty smart ... until a hurricane hits.

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This looks like a way for the insurers to raise regulatory capital. Because capital is extremely subordinate (i.e. it's equity in the business or very low priority debt), it is very expensive to raise. Either it has to be issued in the form of new equity (dilution) or as debt at very high rates (currently around 8-9% per annum, fixed for life - that's a big drop over the last few years. Barclays raised new capital a couple of years ago, paying 14% per annum, fixed for life).

Essentially, you are gifting them your equity, and they are then paying you interest on the equity. Because of the short-term contract (3 years) you don't get as high a rate. Because you are placing your property at extreme risk, you are then having to acquire a CDS from another insurer that will allow you to buy back your property, if the insurer you are gifting it to goes bust. That takes another slice off your income. Then you've got your IFA who takes another big cut (in this case, it's a very generous cut indeed - 1% per year - or slightly less than half of what you yourself get).

So, in effect you are putting your property at extreme risk, but using a CDS to protect yourself. All well and good, if you trust the CDS to protect you adequately - which it probably will, unless we get another financial crisis - and even if we do, it's likely that there will just be another government bailout.

Personally, I'd still be sceptical, as this doesn't seem protected against a 'systemic collapse'. The risks are not fully known, and your income is very low, given the underlying mechanism (partly because there are a lot of very, very greedy parasites siphoning off money at every stage in this complex process).

Finally, the whole scheme smacks of a rather obvious loophole. As the 'Solvency 2' scheme isn't remotely finalised - I wouldn't be the least bit surprised to see this loophole closed before the scheme goes live.

Thanks for the explanation ChumpusRex. So pretty much:

(1) Rent equity to InsuCo for a fee of 2.5% pa (not that attractive, I will rather borrow against the equity and 1.9% and buy a dividend porfolio paying 6%, so netting 4 with inflation protection)

(2) Protecting InsuCo against insolvency via CDS

(3) At end of 3 years, InsuCo 'gift' the money back.

Sounds convoluted. InsuCo might as well buy a 'capital insurance' from the reinsurer or just offload the stuffs to reinsurer unless Solvency2 specifically prevent them from doing that ?

Edited by easybetman

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What's interesting is the opportunity to partake in this kind of thing as a retail punter - basically you are providing a very remote (I assume) guarantee to the insurer. This is actually not a bad play, provided you are young enough to recover if the worst case happens...

According to the (very dubious) promotional stuff seen by moneybox, there is no downside 'cos the insurance company doesn't get an actual legal claim against you. Sounds like a scam against the regulator rather than the homeowner. Moneybox don't see it happening, but I could be rather tempted to buy if it does!

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Good advice. It looks like this turns you into the equivalent of a Lloyd's name.

It looks and feels pretty smart ... until a hurricane hits.

Yes. There is no such thing as a free lunch. Without even perusing the details one knows this couldn't count as capital unless in at least some circumstances their creditors could get their hands on your house. In a systemic crash you can bet your bottom dollar that the insurance will be worthless. Hanging is too good for whoever came up with this scheme.

We now live in a kleptocracy. There is no doubt about it.

"The first thing we do, let's kill all the lawyers." Then we can have the revolution.

Edited by Tiger Woods?

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According to the (very dubious) promotional stuff seen by moneybox, there is no downside 'cos the insurance company doesn't get an actual legal claim against you. Sounds like a scam against the regulator rather than the homeowner. Moneybox don't see it happening, but I could be rather tempted to buy if it does!

It'll all be fine until the creditors take legal action when the insurance fails to pay out...

Dick the Butcher: "The first thing we do, let's kill all the lawyers."

Jack Cade: "Nay, that I mean to do. Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment? That parchment, being scribbled o'er, should undo a man? Some say the bee stings: but I say, 'tis the bee's wax; for I did but seal once to a thing, and I was never mine own man since. "

Edited by Tiger Woods?

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Apparently it involves no equity, then it goes on to say:

£400,000 property mortgage free.

50% equitable charge of the property is signed over, and placed into escrow. (£200,000)

The escrow then pays you 5% of the charge value monthly in arrears for 3 years. (£10,000). Be aware that this additonal income is subject to tax!

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According to the (very dubious) promotional stuff seen by moneybox, there is no downside 'cos the insurance company doesn't get an actual legal claim against you. Sounds like a scam against the regulator rather than the homeowner. Moneybox don't see it happening, but I could be rather tempted to buy if it does!

I thought that the whole point of all this capital that the insurance company has, is that it can be used to pay creditors if things go wrong.

If it cant be used to pay creditors, then it isnt capital. So if you cannot lose your house, then it cant be capital.

Now it may be the case that this new law is just daft, and legalises fraud by insurance companies, allowing them to state capital that cannot be seized in the case of banktruptcy. But I would want no part of that.

Lets hope that they get the law right, in which case all you are doing is obtaining interest on your capital in exchange for the risk of losing your home.

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I thought that the whole point of all this capital that the insurance company has, is that it can be used to pay creditors if things go wrong.

If it cant be used to pay creditors, then it isnt capital. So if you cannot lose your house, then it cant be capital.

Now it may be the case that this new law is just daft, and legalises fraud by insurance companies, allowing them to state capital that cannot be seized in the case of banktruptcy. But I would want no part of that.

Lets hope that they get the law right, in which case all you are doing is obtaining interest on your capital in exchange for the risk of losing your home.

Ah yes, but if it all goes wrong, the house is covered by another insurance that has someone elses house on the block.

I can see it now, as house prices tumble, lets say 20%.

"OOOOH, I only let the insurance company have 50% of my house, and now I have to sell it, they want 50% of the old value and that leaves me with 10%."

Ive been Mis-Sold and want compo.

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I'm guessing the 'capital' part comes in via the security created based on the value of the home.

Presumably that may be the reason you can stay in your home too...i.e. it is the security that is passed round - not the actual home.

I guess everybody wins..the insurer pays out of profits, the householder is paid for doing nothing, the CDS on the equity insurance costs nothing and the law is made whole.

I guess, they have eliminated risk.

just one thing....who is going to buy this extra insurance capability? is there not enough insurance in the World already?

I guess they will have to lower rates to fulfil their commitments to the bond and equity holders....that means insurance will become very very cheap indeed....you wont need a lock on your doors to prevent a claim being bounced....£10m travel insurance?...no problem Edna ( 99 years old ) on a snowboarding tour of the US black slopes...£10 for the whole family, including your mum.

I think I may have seen this somewhere before.

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I'm guessing the 'capital' part comes in via the security created based on the value of the home.

Presumably that may be the reason you can stay in your home too...i.e. it is the security that is passed round - not the actual home.

That makes more sense, in that I can see how they might fall for it.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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