Mark Gettinby looks at how the perception of equity release is changing
With positive demographics, the pensions funding gap and changing attitudes towards inheritance and retirement, it is a surprise that the equity release market is not significantly bigger than its current size of £1.2 billion. The reality is that the market has been held back by negativity in the consumer press and the general misconception that it could result in clients losing their homes.
The equity release market has clearly come a long way from its origins in the mid 1960s and the days of home income plans and shared appreciation mortgages. Thanks to the efforts of SHIP and FSA regulation, equity release customers are better protected now than ever before.
Customers also have access to a wider range of products with increasingly innovative features from more lenders. While equity release is not for everybody, it should definitely form an integral part of an individual's retirement planning, even if it is ultimately decided that there are better options - a view recently supported by former work and pensions secretary, David Blunkett. It is unfortunate that some reporting of equity release has discouraged consumers from taking out an equity release plan, when it could have significantly improved their quality of life by enabling them to access some of the value tied up in their home.
As well as the SHIP guidelines providing increased protection for the consumer, the equity release sector has adapted to its target market's needs with significant product innovation over the past five years. The most important development has been the introduction of drawdown plans that limit the roll up of interest, which is seen by many as the main drawback of lifetime mortgages.
These plans also provide consumers with peace of mind in the knowledge that they have access to additional funds as and when they need it in the future. Such is the popularity of drawdown plans that they now account for approximately 50% of all lifetime mortgages and are part of the product portfolio of all serious lenders in the market. More recent product developments include increased LTVs, and plans with no, or heavily subsidised, set up costs.
Lenders continue to have an appetite for equity release, with the Coventry, Saffron and Dunfermline Building Societies all entering the market within the past 12 months. Rumours persist that a major high street bank is looking to enter the market which would raise the profile of, and is generally expected to be good news for, the industry. Existing lenders continue to fight for market share, evidenced by the fact that interest rates remain competitive averaging around 6.5% fixed for the life of the plan. In general, lenders haven't suffered from the funding issues that have affected the mortgage market, particularly as a number of the main players are effectively self-funding via their annuity books. Given the recent problems in the mortgage market, equity release loans are attractive to lenders as they are secured at a relatively low LTV against the client's property, don't require repayments and tend to be long-term arrangements that don't suffer from churning.
It appears that equity release could be one of the few beneficiaries of the credit crunch. Despite the market suffering in the last quarter of 2007 as a result of the liquidity crisis, volumes have picked up in 2008 and the market is certainly bucking the trend of the mainstream mortgage market. Norwich Union recently announced that they have seen requests for illustrations double.
The wider problems of the economy are not only driving greater numbers, but also different types of customer towards equity release. The recent introduction of schemes with no early redemption charges has meant that clients who are currently reluctant to move are now able to opt for these plans, if they want the option to downsize and repay their lifetime mortgage when the property market recovers.
Falling house prices
Despite the falling housing market, the over 60s are still sitting on a huge amount of equity in their properties. Falling house prices obviously reduce the amount that can be released, and we have seen some clients release equity now to secure the maximum, rather than run the risk that their property falls in value along with the amount they can release. We find that most customers believe the housing market will recover in the medium-term, and are not being put off by raising funds via equity release, particularly as they have the safeguard of the no negative equity guarantees provided by lenders.
All of these factors mentioned above have raised interest levels in the adviser community. Indeed, record numbers are taking equity release exams with a view to providing their clients with advice directly. In addition, the specialist intermediaries are all reporting growing referral networks of introducers who are seeking specialist advice for their clients without the compliance risk of providing advice themselves.
Equity release appears to be weathering the economic storm better than most financial services sectors, and it appears inevitable that it will form an integral part of retirement planning in the future. It is vitally important that clients seek advice from a specialist intermediary and consider all the implications and alternative options before proceeding.
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