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Equity Release – Mortgaging the Empty Nest

  • By Amy Beech

Equity Release, The Former Bad Boy of Old-Age Finance, Is Popular Again, Says Kam Patel. But Relax, Today’s Policies Are Very Different

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With retirement nest eggs and pensions under heavy attack in recent years from inflation, rock bottom returns and stock market woes, many retirees on already tight budgets have become noticeably more cash-poor. It’s not so very surprising, then, that growing numbers of the elderly are looking to tap into the one asset they are likely to have that still holds considerable unlocked value – their homes.

The increasing demand among older householders for equity release solutions is a direct result, of course, of a six-fold rise in average house prices over the last 30 years. But we ought to say clearly that there is still some wariness out there which is taking time to overcome.

The public has not forgotten or, indeed, forgiven, the damage and pain that some of these products caused in the late 80s and 90s when the marketplace was still run with a light regulatory touch. And no wonder.

The Ugly Past

The late 1980s seem like another age these days. A combination of rising rates, rising inflation and falling stock markets had encouraged many elderly people at the time to sign up for equity release schemes that were frankly unsafe – including investment bond schemes and roll-up plans with variable interest rates – all of which combined to bite them badly when inflated property prices burst and lending rates soared.

These offending products were eventually banned – but not before causing seemingly irreversible damage to the public’s trust in equity release solutions and their providers. By the late 1990s their place had been taken by Shared Appreciation Mortgages (SAMs), which were at least a bit better – but rocketing house price inflation now made even these a considerably worse deal for customers than had been envisaged.

This unending history of disappointments is not what you’d call a very edifying basis for the revival of the industry. And to this day, the resulting loss of trust still remains a stumbling block for providers, industry bodies and regulators, as they look to reassure a sceptical public that the new types of equity release are indeed fairer and more rigorously policed, and that consumers are being better protected.

Winning Back Trust

But there is growing evidence that the equity release camp is slowly winning its battle.  Only last month the Equity Release Council, the main industry body, reported that the equity release market had notched up its best first quarter in four years, with £234 million worth of plans taken out over the first three months of 2013. The average plan value, it said, had also grown by 14% to £55,985 – the highest since quarterly records began in 2002. And for a second successive quarter, independent financial advisers were responsible for 92% of the value of equity release plans agreed – their largest market share in the last decade.

Research by retirement expert LV, also published last month, provides more encouragement for the industry, revealing as it does that 88% of the 50 advisers it had polled believed that equity release should be a key consideration when planning for retirement.  Furthermore, it said, 95% of advisers considered equity release to be a significant growth area for their business. A full 78% said that they expected equity release to become a mainstream financial product within the next few years.

Two Basic Approaches

At present there are two main solutions being offered by the equity release industry – lifetime mortgages and reversion schemes.

The lifetime mortgage option entails a sum of money being borrowed against the value of the home to give either a lump sum or a regular income to the owner, who continues to own the home.  The loan is repaid to the lender when the property is eventually sold.

By far the most popular solution of this type is drawdown, which accounted for 62.3% of the market by value during the first quarter of 2013 – down slightly from nearly 67% in the same period last year. In this situation, the customer may take a smaller amount at the outset and then draw down further borrowings as required. Since interest is paid only on the money taken, the overall cost can be considerably lower.  But traditional lump sum solutions still accounted for 37.6% of the market during the first quarter, up from 31.8% a year earlier.

The other main option for consumers is called a reversion or part reversion scheme, and it involves selling the home – or part of it – to a reversion company that will allow the owners to continue to live in it for the rest their lives. Upon death, or upon moving house, the proportion of the home that was sold becomes the property of the reversion company. The remainder passes back to the client, or to his estate.

Stephen Lowe, group external affairs and customer insight director at Just Retirement, a leading retirement adviser and the second largest provider of lifetime mortgages, says he is confident that the industry has a bright future. He expects the first quarter’s very strong activity to continue, with 20-25,000 plans being signed this year and with a total value of more than £1 billion. That would compare with the 17,700 plans worth £925 million that the Equity Release Council reported for last year.

Just Retirement has seen its own sales jumping by more than two-thirds in the last three years. And it says that a recent customer survey found that 96% of clients who had taken equity release had declared themselves ‘very happy’.

The Income Squeeze

Growth, says Lowe, is being driven by several factors, of which high home ownership rates are a key starting point. Of the 7.5 million pensioner households in the UK, he says, about 90% of pensioner couples and two thirds of single pensioners own their own homes. “Most have done well from rising home prices over the years,” he says, “and even recently the property market has remained robust. The result is that the over-65s are sitting on property equity estimated at more than £750 billion.”

“However, the income that older people can generate from their pensions and savings is being squeezed. We are therefore seeing increasing number of ‘asset rich, income poor’ pensioners turning to equity release as a way to boost their spending power.”

Public concerns about equity release remain – and understandably so – but Lowe insists that the industry has made consumer protection a particular priority over the last 20 years. And that the Equity Release Council imposes a rigorous code of conduct on its members that includes, for instance, a ‘no negative equity guarantee’ that ensures that people cannot be asked to pay back more than their home is worth.

People purchasing from Equity Release Council members also have the protection of a ‘triple lock’ – which means that they must use both a professional financial intermediary and an independent solicitor to ensure fair play. The plans themselves are of course regulated by the Financial Conduct Authority. “No-one can sleepwalk into an equity release plan without understanding exactly what they are taking on,” says Lowe.

Lowe is keen to stress that equity release works across a range of scenarios – and therefore, that it isn’t just for people looking for a lump sum or to pay off debts. It’s an option, too, he says, for those who need an income boost because they can’t secure sufficient pension income, or because inflation has eroded the value of the income. And it may play a part in inheritance or care fees planning.

It can also suit those people who either cannot or don’t want to sell up and move to a smaller home – for instance, by using the money released to fund alterations or improvements that will enable them to stay put for longer.

Advisers Need Qualifications

It is absolutely critical that anyone considering equity release conducts some basic research. The Equity Release Council is certainly an important first point of contact, with a useful directory of members including advisers and solicitors. But Lowe also recommends paying a visit to the Money Advice Service, a source of free and unbiased information.

“It is important to take professional advice to explore all the client’s options,” he says. “Not just to decide whether equity release is suitable, and which provider offers the best value, but also to consider any impact that it may have on inheritance or state benefits.” (The extra income from an equity release may sometimes result in the reduction or loss of some means-tested benefits.)  “Like downsizing, equity release is a long-term commitment, and it will not suit everyone. It is an emotional as well as a financial decision, so people need to feel comfortable.”

You won’t be surprised to hear that Lowe thinks that all advisers should consider this “exciting niche area”, and that they should factor it into their overall business strategies as an option to offer their clients. But he stresses that advisers who want to get directly involved will need to have the correct qualifications and business processes (see below), and that they should seek membership of the Equity Release Council.

Some advisers will prefer to act as a referral service rather than acting directly with clients. Many of the larger providers offer support to help advisers break into the market and build up the scale of their equity release businesses. They may, for instance, provide a suitability report writing service, and perhaps exam revision courses for advisers wanting to upgrade their qualifications.

Room For Growth

Although equity release has been around for several decades, in many ways it’s still something of a fledgling market. Just Retirement’s last survey found that around 8% of older homeowners were ‘very/quite interested’ in equity release – which would seem to imply a potential market of about 600,000 out of the 7.5 million pensioner households. But if plan sales last year were fewer than 20,000, then there would seem to be clear potential for much faster growth. Especially if the plans themselves continue to evolve to meet people’s needs.

Independent industry research suggests that equity release may have the potential to lift a million pensioners out of poverty in the coming decades. That’s a point which is not lost on Age UK, a charity which provides information and advice to the elderly, and which is becoming steadily more interested in equity release as an option for elderly people in need of funds.

Jane Vass, Age UK’s Head of Public Policy, acknowledges that the public in general remain suspicious of equity release, due to its past misdemeanours. But, she says, “It’s fair to say the industry has substantially cleaned up its act – and, of course, equity release products are now fully regulated by the Financial Conduct Authority.”

Proceed With Caution

Age UK’s own commercial arm, Age UK Enterprises, includes an equity release advisory service, which it runs in collaboration with Just Retirement. But Vass urges anybody considering equity release to be sure that the product is right for them, “as it is difficult and sometimes impossible to cancel an equity release arrangement”. Age UK recommends that interested parties should:

  • Take advice from an independent financial adviser when considering equity release;
  • Make sure that the plan is being bought from a firm that is authorised by the FCA;
  • Consider the impact of a scheme on any benefits being received, and the possible effect on future entitlements.

“It is our understanding that under FCA regulations only equity release qualified IFAs are able to sell equity release,” says Vass. “And therefore no IFAs should ever be going into this business ‘cold’. Clients should always be directed to advisers with specialist qualifications and experience who can cover the whole market.”

Ask The Family

Gordon Morris, MD of Age UK Enterprises, says the service, which is not open to IFAs, provides fully advised face-to-face appointments in customers’ homes, at which a range of products from various providers can be considered. Telephone discussions are also offered. But he warns that prospective purchasers should always consult their families.

“Clearly, as this is a big decision, family involvement and discussion is encouraged and the alternatives to equity release available, such as grants, are discussed [at the meetings]. A state benefits check is also undertaken, to check that all benefits are being claimed before proceeding and the effect on state benefits is assessed if an equity release is to be taken on.”

“Equity release is a valuable option for some people,” says Vass. “But growth of the sector is constrained by supply issues – there aren’t many well-known providers, and policies should only ever be sold by specialist advisers – as well as by customer wariness. “

“People do need to proceed with caution. In order to build customer confidence, it is really important that FCA maintains its current level of regulatory oversight.”