Equity release entering ‘crucial stage’

Equity release is a high profile and evolving market which is entering a crucial stage in its development, according to the latest Defaqto report (reports Financial Adviser, 23/4/07).

But the report warned that equity release is still tarnished with the bad publicity that came from products available in the late 1980s.

Defaqto has identified key criticisms of the market and the way forward for advisers and providers.

David Black, head of the banking research team at Defaqto, said the combination of under-funded pensions, low annuity rates, demographics and overhanging pensioner debt plus the levels of equity built up in housing stock should mean more pensioners take out the product.

However, the report states there ‘remains the possibility in future years that equity release will become a compulsion rather than an option as the Government tussles with the income requirements of the projected rapid expansion in the elderly population.’

Mr Black added: “The reality is that such a politically unpopular approach would not be too far removed from the current deferred payment scheme operated by local authorities to help homeowners fund their long term care costs.”

SHIP mortgage exam success

Safe Home Income Plans (SHIP), the equity release industry body, said that from 1 August, SHIP members will no longer accept any business from advisers who have not passed the appropriate lifetime mortgage exams, reports Financial Adviser (3/4/07).

SHIP research shows that 723 people have taken and passed lifetime mortgages examinations since February 2007, taking the total number of those who have passed to 6742.

With more than 700 more applicants taking these exams over the next two months more IFAs will be qualified by the summer deadline.

Jon King, chief executive of SHIP, said: “It is very encouraging to see the increasing number of individuals who have taken the time to study for and pass the lifetime mortgage examination.

“SHIP’s decision to make home reversion examinations compulsory for IFAs wishing to work with its members from April 6 2008 was taken as a further attempt to continue to improve standards in equity release advice available to consumers.

“With many exam options available we urge more advisers to register and take advantage of the opportunity presented by equity release.”

Home reversion 'to grow fourfold'

Home & Capital has predicted the home reversion market will grow to 20 per cent of the equity release market on the back of regulation, (reports Mortgage Solutions 2/4/07).

Home reversion plans currently equate to 5% of the equity release market. As home reversion plans become a mainstream retirement planning product, volumes could grow tenfold in less than a decade. It will also help the whole market to grow and start to deliver on independent estimates of a doubling of the equity release market by 2010.

The new regulatory regime extending to home reversion plans, which starts on 6 April, is being introduced following extensive lobbying by the industry, and will help millions of older Britons to provide for their retirement years.

Nigel Hare-Scott, sales director of Home & Capital, explained: “This country is facing a pensions debacle. Final salary pension schemes continue to close, the performance of money purchase schemes is insufficient, and the Government cannot keep supporting an ageing population going forward. However, homeowners do have considerable property wealth and can use this to supplement their retirement income.”

“Often, the best decision for people is to trade down - sell a property which is too big once the children have left, buy a smaller one and release a cash sum. In other circumstances, the individuals may for personal reasons wish to stay in the family home and equity release is the most suitable choice.”

Equity release products have existed since the late 1960s and John Inskip, founder of Home & Capital, invented the first home reversion plan in 1978 – a means by which a homeowner could sell the home for a cash lump sum and receive a rent-free lifetime lease. Home reversion plans were excluded from regulation as there was no evidence of ‘consumer detriment’. This meant, however, that advisers tended not to recommend (unregulated) home reversion plans, even in instances when it was more appropriate than a (regulated) lifetime mortgage.

“We lobbied for regulation of home reversion plans because it created a level playing field in the equity release market,” continues Hare-Scott. “Not because there had been any instances of malpractice or consumer detriment that needed to be eradicated. Complaints are consistently very low.

“This level playing field will help ensure that people are genuinely given independent advice with all the options fully explained – downsizing, lifetime mortgage, home reversion plan, or do nothing. Advisers will be under a clear obligation to cover all the options and guide customers fairly and objectively, and to that end training is being strengthened.”

Home reversion plans may have been overlooked in favour of lifetime mortgages, but have features which give them greater appeal to some customers:

• Certainty and simplicity. Once the percentage of the property being sold and the amount of the lump sum is fixed, all the financial arrangements are fixed

• It is not a loan and no interest is calculated or payable. Some elderly people have an aversion to debt and will not therefore take out a lifetime mortgage, even with a no negative equity guarantee

• A larger amount can be raised compared with a lifetime mortgage

• A plan holder can sell an initial percentage of the property, and then progressively raise additional sums until 100% is sold

• There is flexibility to move house

Hare-Scott concluded: “We believe that the implementation of regulation will act as a catalyst for the growth of home reversions, which could triple over the next couple of years, and increase tenfold in less than a decade. Home & Capital, which has an FSA-authorised subsidiary to advise on a full range of equity release products, is committed to continuing support of the nation’s pensioners in making the right choices about their future financial planning.

“Good Friday, on which regulation begins, is a good day for our industry.”