The aging population means that the over-60s market is growing ever more important with equity release being one of the main consumer needs. Peter Madigan investigates
The well-publicised crisis in the UK pensions sector has prompted the Government to urge the working population to start making provisions for their retirement. The Department of Work and Pensions predicts that by 2035, a quarter of people in Britain will be over-65. Combine this demographic shift with the current unpopularity of pension schemes and the fact that personal debt in the UK now exceeds £1 trillion, and it is clear the workers of today may have limited funding options for their retirement.
One funding method that has become increasingly popular in recent years is equity release. This is a way in which a homeowner can free up a proportion of the cash locked in their home by either taking out a lifetime mortgage or by selling a percentage of the property to a private firm in a home reversion. In both these instances, the homeowner is free to remain in the property until the time of their death or when they move out.
At the moment, equity release remains an obscure area of retirement planning that has attracted relatively few intermediaries and is beset by a tarnished image. Despite this, equity release is proving increasingly popular with the over-60s market and specialist advisers are keen to boast of the strong growth potential and the added value to older clients by having a working knowledge of the sector.
"The biggest problem in the equity release market at the moment is that access to quality advice is very limited. There simply are not enough experts," says Jon King, managing director of Hodge Equity Release. "There is definitely room for exceptional growth, the only issue is about getting the information out there to customers."
Bad reputation
Lifetime mortgages are by far the more popular of the two options with an overwhelming 95% share of the market, according to the Council of Mortgage Lenders. Part of the reason that reversions have such a small sliver of business is that there are fewer lenders providing reversions than lifetime mortgages and, as an unregulated market, consumers may be somewhat more cautious of reversions.
Nonetheless, reversion regulation should be in place by early 2007 and the slowdown in the housing market may provide a jolt as homeowners choose to opt for a reversion, which provides a fixed debt. Additionally, rises in house prices may no longer offset the interest paid on a lifetime mortgage. Even so, equity release still has a bad name which it needs to shake off.
"The bad publicity that equity release has had came in the 80s when homeowners were borrowing at a variable rate of interest, so in some cases the debt that people owed exceeded the value of the property," reveals King. "Today the mortgage would be capped or be at a fixed rate."
In addition, all members of Safe Home Income Plans (SHIP) offer a no negative equity guarantee, which means that even if the value of the mortgage exceeds the value of the home, the borrower, or his dependents, will never be liable to pay anymore than the house is worth. With these safety features in place, why are so few advisers engaged in the equity release market?
"In general, the commission on lifetime mortgages is better than those offered for mainstream mortgages or remortgages, but there is much more work involved," says Sue Lewis, IFA at Ward Goodman. "You have to assess assets, look at what other funding options are open to the client and discuss things with the family. While a remortgage could be completed within four to six weeks, with a lifetime mortgage you are looking at between eight to 12 weeks," she adds.
Expanding market
Accordingly, the extra work brings extra remuneration that should be attractive to advisers but the actual commission potential can prove deceptive. "For setting up a normal residential mortgage an adviser can expect no more than 0.5% commission, but for a lifetime mortgage the average payment is 1%," says Roger Hillier, product development manager at Mortgage Express.
"This may sound attractive but when you consider that the average residential mortgage is around £100,000 and the average lifetime loan is £50,000, there is actually no difference. Some brokers supplement this income by charging a broker fee to the lender," he adds.
So far, equity release appears an obscure area of retirement planning that is both time consuming and promises little reward. It is hardly surprising therefore, that advisers are not clambering to enter the market. But demographic trends look certain to force equity release to the forefront of the retirement planning market.
According to figures from the Institute of Actuaries, 26,000 new equity release plans were set up in the UK in 2004, amounting to a figure of £1.2bn of equity being freed up. Research carried out on behalf of Prudential states that there may be as much as £693bn of unreleased equity being held by retired homeowners and with the retired population on the increase, this figure will continue to grow.
The potential for a torrent of business is there, but that promise cannot be realised unless more intermediaries start advising. Conversely, IFAs will not take the time to gain the requisite qualifications without the process becoming much more profitable and streamlined, something that is already being looked into.
"The Council of Mortgage Lenders is running several initiatives to illustrate to IFAs the opportunities available in the equity release sector, including information on the sales process, tax considerations and benefit entitlement," says Hillier. "This also includes an introduction to the FINTAL database in which you enter a client's financial details and it calculates exactly what benefits that client is entitled to. It is an effective time-saving tool," he adds.
Similarly, lenders are starting to offer higher commission in recognition of the time commitment involved. "We want to encourage more advisers to come into the equity release sector and we realise that our commission has to reflect the extra time it takes to set up these plans. That is why we have increased our commission to 1.5%," says Nigel Spencer, head of marketing at Norwich Union Equity Release.
Developments like these indicate that lenders are becoming more conscious that they will have to do more to make equity release a worthwhile addition to an adviser's portfolio. It is not simply enough to assure advisers of all the business there is to be had without ensuring that that business can be written with relative ease and for a decent price.
Consumer benefits
With reversion regulation in the pipeline, lifetime mortgages already standardised and both the FSA and Financial Ombudsman Service watching the market carefully, consumers can have some degree of certainty that there will be no repeat of what happened in the 1980s. Factors within the market are also conspiring to make the proposition more attractive to customers.
"The cost of lifetime mortgages has dropped in recent years from 7% to 6% and this has coincided with the launch of new drawdown mortgages," says David Still, retirement director at Prudential. "These are plans where you can release a sum of equity but then only draw on the money as and when you need it. In this way, with only part of the loan been used, you only pay interest on the money that you have actually drawn. They have proved extremely popular," he adds.
For all the work that lenders have done to make equity release as streamlined and financially attractive as possible, perhaps a greater emphasis has to be placed on the role equity release plays in the wider remit of financial planning.
"We regard equity release as a last resort measure, a sort of act of desperation. We would like to think that all of our clients will get to the stage whereby this never happens," says Warren Perry, head of research at Churchill Investments. Lenders are keen to combat widely held opinions such as this.
"In the main, people who release the equity in their homes do so to finance home improvements, a holiday or a car. Equity release funds purchases that clients have aspired to have rather than providing a breadline income," says David Still, retirement director at Prudential.
The bad press that equity release has traditionally received seems increasingly outdated. Equity release is a growing market and population trends seem set to ensure that growth will not only continue but in all probability accelerate rapidly. More business will mean that the market needs more advisers.
"Access to advice is the only thing holding this market back," says Spencer. "What we need to see is advisers going out and actively getting customers as opposed reacting to the customer need like they do now."
COVER NOTES
- There are two forms of equity release: a home reversion which sees a portion of the property sold off to a private reversion firm, or a lifetime mortgage.
- A bad reputation, time-consuming processes and limited commission potential has meant that the majority of advisers have shunned equity release in the past.
- The aging population and widespread distrust of the pensions market along with better protection for consumers are having a positive effect on the equity release market.
