Nigel Hare Scott discusses how the equity release market is evolving in these turbulent times
So many of the things taken for granted have come unstuck over the past year. House prices are no longer a one way bet, investment bankers are no longer masters of the universe, trade and personal credit is no longer freely available - worst of all perhaps, retirement plans have unravelled tragically for those without the protection of a defined benefit pension scheme.
The latest figures from Safe Home Income Plans (SHIP) would, at first glance, suggest that the equity release sector has similarly lost its way. The overall sum advanced during 2008 is the lowest it has been since 2002. This result is despite extensive product innovation, a reduction in the minimum age criteria and an increase in life expectancy. Thus the value of plans being sold is not even matching the growth in the number of homeowners who are eligible to participate.
But change is in the air. Equity release is steadily becoming a more commonplace transaction albeit that many consumers give it serious consideration but do not make a commitment for some time ahead - this explains the importance of their client database to financial intermediaries involved in the sector. Lead times can be long, and this should not be surprising for products which are best suited when forming part of people's routine retirement planning rather than as a last resort option.
A review of typical enquiries over recent months reveals there is far less scepticism about equity release than used to be the case a few years ago. Furthermore, consumers are far more inquisitive about the plans available and are often genuinely surprised at the many options that are now available, particularly to those who are looking to enhance the quality of their retirement life. The implementation of a comprehensive regulatory umbrella for most types of equity release product has clearly provided reassurance. This has mitigated the fear factors about the sector and done much to remedy its past reputation. Most importantly, it is now widely acknowledged that equity release should not necessarily be considered as the last resort option mentioned above, even if it has taken a drastic downturn in the property market to prove the point.
The SHIP headline statistics do not disclose on a cumulative basis the value of standby facilities that have been set up as part of flexible drawdown lifetime mortgage plans. If these sums are included, there would in all probability have been an increase in the value of transactions over the past year. The majority of plans are now set up on this basis - indeed SHIP reports that the sale of drawdown plans increased by 13% over the 12 months.
One issue facing adviser firms is that the type of person considering a lifetime mortgage or a home reversion plan is very disparate. For example, last year Home & Capital dealt with clients owning properties varying in value from £60,000 to over £10 million. Similarly the reasons causing them to find out more about equity release are very diverse. While this makes the role for the adviser unpredictably interesting, the sourcing of enquiries needs to be wide ranging in order to capture the attention of the potential client base. It is not possible for an adviser firm to rely upon any single method of generating leads for too long. Despite greater media coverage about equity release, it is still necessary for those involved in the sector to spend a large share of their income upon advertising and marketing. This is unlikely to change in the short to medium term, as a regular flow of new enquiries is the lifeblood of an advisory firm. It is not possible to rely upon churning out previously arranged deals.
Why do people take out equity release?
Any discussion about perception should look at the reasons why people enter into equity release plans and assess whether there have been any significant changes particularly since the credit crunch. Five years ago, home improvements and mortgage repayment topped the list among Home & Capital's clients. An analysis of the past year reveals that home improvement has dropped well down the list despite the large number of property makeover shows on the television.
The leader by a long way is now unsecured loan and mortgage repayment, which is perhaps a reflection of the credit binge that has been taking place, even among the elderly. Similarly, re-mortgaging comes high up the list as clients have taken advantage of more attractive deals whenever the early redemption penalties on their previous plans have not made it uneconomic to do so. It should be noted that family support has also been prominent, with equity release being used as a method of getting the grandchildren onto the housing ladder at a time when residential mortgage funds have dried up.
The perception of equity release is also changing among the providers. While some have dropped out during the credit crunch, e.g. Mortgage Express and Bristol & West, it is notable that funds are still readily available for the sector. The lenders in the ascendancy are currently those that have annuity funding, which would seem to be a natural hedge with equity release.
Those involved in equity release, be they advisers, providers or the regulatory bodies (i.e. SHIP and the FSA), can be reassured that the work they have done over the past few years has been successful in making consumer acceptance of equity release less of an issue. Regrettably, in the short run, this progress is in jeopardy of being disguised by two new constraints:
1. The endless economic gloom as reported in the media discourages lifestylers from sending in their applications;
2. The large gap between base and longer term fixed interest rates encourages delay among those who do not have an immediately pressing financial need.
Thus many potential applicants are now holding back. However, it can be expected that these consumers will be returning soon as the impact of the low return on savings incomes hits home.
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