Jon King looks at how the equity release market will fare during the credit crunch
While the credit crunch has taken its toll on the UK mortgage market, it would be fair to say that the equity release sector has weathered the storm better. In the summer of 2008, Hodge Equity Release targeted a cross-section of IFAs from across the UK to discover the perceptions and thoughts of those operating within the equity release sector. Seventy-five per cent of advisers reported an upturn in equity release enquiries between May and July 2008 and 70% expect to see at least a 5% increase in their equity release business between September and November 2008. A recent speech by former home secretary David Blunkett also advocated the use of equity release as a way of freeing up money in retirement. With such positive perceptions in the present economic climate, combined with Government recognition, it is pertinent to consider reasons contributing to the sector's growth.
For most people, property is their only or greatest asset. As a result, it may be a sensible option to consider using this asset when looking to generate additional cash. Although property prices have fallen over recent months they have increased significantly over the long-term, and many people who are in a position to consider equity release are likely to have been in their homes long enough to have seen a sizeable increase in their value. For this reason, taking out an equity release plan is one logical option to make the most of the value of their property without being forced to move.
Before the credit crunch took a firm grip on the UK's economy, the primary reasons for taking out equity release plans were to fund large expenditures such as paying for holidays or improvements to the home. However, in today's society, the need for equity release to supplement state pensions is more evident than ever. Britain's increasingly ageing population, combined with the rising cost of living, has dented retirees' income into old age. When falling pension values are also then taken into account, it is unsurprising that people are looking for alternative ways in which to supplement their income during retirement. Equity release has also become an increasingly popular option for those who wish to help family members with large financial milestones such as stepping onto the property ladder or assisting with university fees. When disposable incomes are already stretched to pay for simple necessities this use has become especially important in recent months.
Despite continued attempts by equity release providers and IFAs, as well as efforts by SHIP to quash the negative perceptions of equity release, misconceptions still remain and this is one of the biggest challenges facing IFAs. According to Hodge Equity Release's IFA Confidence Report, the biggest worry for 75% of IFAs when advising on equity release products is the negative reputation of the products, particularly the historic equity release plans, and the way they are portrayed within the media.
There is also the widespread misconception that taking out an equity release plan could result in customers losing their homes as equity release and sale-and-leaseback schemes become confused. Through SHIP approved providers, all clients are promised rights of tenure for life. However, the same is not true for sale-and-leaseback which is currently unregulated. Forty per cent of IFAs surveyed by Hodge expressed concern for the potential confusion between the two and the potential affect upon the sector's reputation. It is therefore important that equity release providers and advisers take a firm stance to ensure consumers do not continue to associate the two.
Products and redemption penalties
While the mortgage market has been severely affected as a result of recent economic events, equity release has not been affected to the same degree by the credit crunch. As a result funding among lenders remains apparently healthy. Equity release has also been bolstered as a result of new lenders entering the market, driving competition and innovation. New products, including flexible plans, have been designed to suit a range of needs, which, in turn, has meant that a wider variety of schemes are available for consumers.
Having an array of flexible products to choose from is especially important if clients wish to move their plan should their circumstances change. However to do so, advisers must ensure that redemption penalties are at the forefront of adviser understanding. Equity release requires advisers to help clients minimise their eventual repayment and all IFAs surveyed thought that redemption penalties should always be considered in their advice to clients.
This importance placed upon the advice process within equity release is highlighted further through SHIP's insistence that all sales through members are to be made on an 'advised' basis and SHIP will not permit execution only business. The significance of advice was further demonstrated on 1st August 2007 following the introduction of mandatory examinations by the trade body in lifetime mortgages for all advisers wishing to work with its members and on 1st April 2008 these were extended to home reversions.
While the current property market situation may have deterred some homeowners from moving, it should not put off anyone currently considering equity release. The amount of equity sitting in property is substantial and this, alongside competitive interest rates on equity release plans and an array of products to suit different requirements means that equity release should be often viewed as an attractive option. Although there is still a long way to go before all misconceptions are quashed, factors such as the full regulation of both lifetime mortgages and home reversions should improve long-term confidence in the sector as the equity release market continues to look towards a buoyant future.
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