Fiona Murphy asks advisers why home reversion plans are the underdogs of equity release and where the product can be used to a client's advantage.
It's no secret that equity release is getting on its feet again. Although the figures have yet to reach pre-credit crunch levels, new advances pierced the £200 million barrier in Q.3 2011. But this success isn't shared in the market as a whole.
Drawdown lifetime mortgages account for 61% (£126 million) of sales, while home reversion schemes are a minnow, taking 2% (£5m) of market share. So why is this veteran of the equity release market, the underdog?
Firstly, many people are spooked by the home reversion plan's USP. Bower Retirement Services adviser Simon Chalk explains: "If you simply said to a client you have these options: one is a lifetime mortgage rate, where the interest just rolls on and the other is a home reversion plan which involves selling the whole or a part of your property, the conversation won't go past lifetime mortgages. As soon as you'd introduced that theme to the client's mind, that the home reversion plan involves a sale, they instantly put the barriers up."
Chalk believes adviser attitudes shape client responses: "There's a lot of advisers who are not equity release specialists and would rather choose the easy lifetime mortgage option rather than considering, investigating and recommending where appropriate, home reversions."
In addition, Bridgewater Equity Release head of sales and distribution, Peter Welch says: "Advisers like to think we're taking something away from the customer. [In] reality the customer is buying something from us that has a value to them and the rest is theirs to go into their pocket."
"We appoint an independent valuer to value the house. Provided the property is within our criteria, we are permitted to purchase it at the price we publish for the customer; it is actuarially worked out based on their age, sex, marital status. We will pay the customer what the valuer says it is worth. A customer purchases a lease which entitles them to live there rent free for all of their life. So that has a premium to it. Whatever's left is what is released."
So who does the product suit? Andrea Rozario, director general of SHIP says those "needing to release more equity than on a lifetime mortgage. It might be they want to ring-fence an element of equity and sell 50% of their property, knowing they've got 50% to come back to at a later stage."
Welch says: "It's for customers who want absolute security and certainty. They may be debt averse. They may be worried about roll-up interest and the open-ended commitment of that product. They're risk averse customers who ask ‘what happens if I might live too long' or ‘what happens if house prices do not go up' or ‘I want to make sure my children have an inheritance from me.'
Looking at these issues in turn, forecasting client longevity is important for equity release. Chalk says: "You need to ask questions around longevity in the family, any illnesses that could be passed on generation to generation, and that takes skill and sensitivity. I think a lot of advisers aren't trained or confident enough to ask the right questions. If you could solicit that information from the client and if there's no reason to believe that client won't enjoy a long, healthy lifespan, you've got to look at the reversion route."
What are the financial implications of product choice? Chalk illustrates: "If you took a lifetime mortgage at today's interest rate, that debt doubles every 10 years. One in six of us aged 60 today are supposed to live to 100. [For those taking an equity release plan] they'll still have that [debt] in 40 years' time, [but it will be] 16 times the level. So £50,000 taken on a modest £250,000 semi will be £800,000 by the time you get to the end of your life. So your [house's value] has got to treble and then some to [ensure] there's any equity left remaining for you and your estate. With negative equity the provider takes that risk, as there's a no negative equity guarantee, but I think a lot of advisers don't think of the risk of living too long with equity release." Carrying out a reversion rather than a lifetime mortgage, can mitigate this hazard.
Next, depressed house price inflation can mean consumers benefit from home reversions over drawdown. Welch says: "if house prices don't go up at the level expected, then with the lifetime mortgage, the interest will erode the equity or capital in the property. With home reversion, you're passing that risk onto the provider."
In addition, there has been an increase in pensioners using home reversions to trade up; some to afford homes close by children living in more affluent areas, others to retire in luxury.
Welch had one particular case: "We recently had an application from a man in his early 70s. He wanted a house with a swimming pool to stay fit. His children were better off than he was so he wasn't worried about leaving them money and he wanted to enjoy the rest of his life in a dream home. He sold his house for around £400,000 and we purchased the new one [which was worth around £600,000] and the difference was funded by an equity release on the shortfall of £200,000. As a reversion allows you to typically release more equity, you can buy a more expensive property. It is growing in popularity but advisers, estate agents and mortgage brokers aren't aware of it."
Why aren't these professionals engaging with home reversion? Welch continues: "[It's] marketed around home improvement, going on a cruise or buying a new car. It's not aimed at purchasing a new house. A far as regulation is concerned, we can't do a home reversion plan unless the property is owned by the customer and they're selling it to us, so solicitors have to technically purchase the property in the client's name and there's a simultaneous transaction where we would do the equity release for the customer. It's like a back-to-back transaction. Customers aren't worried about selling the house because they never owned it. "
Growing the market?
But how can we encourage advisers to look beyond drawdown, where appropriate? Welch says: "Advisers would benefit by understanding a bit more about what is involved with the legal obligations for the provider with a reversion. They'd be able to reassure customers they can live in peace in tenure for the rest of their life. The only thing that's changed is the legal documentation on their property."
Chalk hopes professional bodies can buoy advisers' understanding of how home reversions work within the equity release market. He says: "Exams need to go much more into the advice process, the thought process and the sensitivity of equity release and it needs to consider the needs of an ageing client in that market place. There needs to be a better understanding of the benefit system, the tax system, how they interact with and are affected by equity release, and the care system. But the way examinations are structured, it commoditises the [products], treats it like a mortgage."
"He adds: "If you're relying on the good will of product providers to train advisers and run seminars, long may that continue, but its' not the best source of information and I hope SHIP in its wider remit will offer some sort of enhanced level of training to individual advisers who wish to credit themselves with membership."
Beyond qualifications, it is clear regulation needs an update. The FSA's factsheet for mortgage advisers reads as follows: "If you are only conducting lifetime mortgage business then you do not require any further permissions if you are already able to give advice on mortgages".
Their stance continues: "If you are advising on both lifetime mortgages and home reversion plans you need additional permissions covering home reversions as well as permission to advise on or arrange regulated mortgage contracts." Is it any wonder some advisers are au fait with lifetime mortgages and not reversions?
So, what are home reversion products' prospects for development? Peter Turley, director of Newlife says: "I don't think it's going to get any lower than it is now. If only we could interpret people's perceptions about house price growth. If we go back into the rampant days of 10% per annum, where people had a real expectation that was going to happen for the next few years, they are going to be reluctant to give away such house price growth. But I think [growth is] going to be flat at best. It might rise in two or three years, very slowly but my view must not be shared by the majority of homeowners. They must believe that house price growth is coming back. If sales [of home reversions] have fallen, when prices have actually fallen, I'm not too optimistic about reversions over the next two to three years. I'm far more optimistic about equity release generally, than specifically home reversions."
Due to the small number of providers, Sixty Plus managing director, David Wright adds: "Arguably we need greater competition in the market." But this may never happen due to product suitability.
As Rozario says: "[Home Reversions are] a small part of the market, but that's not to say it's not a valid part of the market, because for some it's the better product but that depends on the individual's circumstances."
"What [SHIP is] interested in is the code of conduct is abided by and the customer has choice and peace of mind. We wouldn't favour home reversions over lifetime mortgages and vice versa. What we would say is the more choice the consumer has and the more various product features to meet specific needs, the better the market is served. "
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