The number of individuals looking to release equity in their properties to fund their lifestyles is increasing. Despite this, it is still not an easy sale for advisers. But armed with the facts, it can be a useful extra-income stream.
The trade association, Safe Home Income Plans (SHIP), reports that the market grew over 700% during the last five years from £70m in 1997 to over £570m in 2001.
This increase hinges on a number of reasons: disappointing returns on investments impacting on pension pots, poor pension provision and also the increase in property values, which means many individuals who struggle to meet day-to-day living expenses have huge amounts of equity tied up in their homes.
‘The business out there is growing by leaps and bounds and that is what you could expect with property values increasing, equity markets going down and capital being eroded,’ says Mark King, managing director of Crown Equity Release. ‘People can top up their income and realise the house which was worth £100,000 five years ago is now worth £200,000, so they can sell a bit of that and still maintain its value.’
Another key reason behind this growth is the work of SHIP in rebuilding the reputation of the sector since the problems in the 1980s.
At the time many popular schemes were linked to the stock market, which subsequently crashed and left individuals with debts, rather than income during their retirement. SHIP-accredited lenders are guaranteed not to base loans on equity investment or variable interest rates.
Opening new doors
Despite this growth, IFAs are still missing out on this market because they underestimate the value of the business.
King says: ‘Equity release is often seen as a desperate move. It is not and never has been ‘ it is aspirational and about people trying to maintain their lifestyle.
‘The average value of the properties I deal in is £250,000. But IFAs tend to go to the lower end of the market, when in my experience it suits middle-class people who have not put enough in their pension fund. They realise this is a practical way of realising some capital when they need it. And the higher the value of the property, the more the value to the IFA in terms of the commission they are making.’
So the opportunities for advisers to do business in this area are great, but just as important is the advice they can give clients in selecting the most appropriate scheme for them.
With equity release schemes the amount the client receives will depend on their age and gender. Older people and men get more than younger clients and women because statistics show the latter will live longer ‘ which means the lender has to wait longer for a return on its investment.
Most equity release schemes are only available for individuals aged at least 60, and the maximum amount that can be drawn down is usually 75% of the property value. The property must be worth at least £30,000-£40,000, although Home and Capital Trust will only loan on properties worth £65,000 or more, and Key Retirement Solutions £75,000.
Some providers stipulate minimum and maximum loan amounts. For example, Allchurches Life Assurance Home Income plan has a minimum loan amount of £25,001 and a maximum of £30,000 or 70% of the house value. They will consider loans above £30,000 individually, although the value of the property would have to be large enough to justify this larger loan.
While Key Retirement Solutions minimum property value is higher (under its Orchard Cash Plan) the proportion the client can borrow is higher as well, between 50% and 90% meaning £37,500 or £67,500 on a property worth £75,000. However, not all clients will want to commit such a high proportion of their home, and so their plans for leaving anything to their estate must be discussed carefully.
Other possible stipulations include the need for the house to be freehold, while others may insist the construction of the property is cement and bricks, and some may want to know who else is living in the property.
However, some can be more flexible in that they will consider purpose built and converted flats, leasehold properties where the lease has less than 80 years remaining, properties owned by the occupier and a third party, as well as properties of non-standard construction.
In any case, legal and valuation fees will be incurred and some providers will reimburse these, whereas others will charge an administration fee. The point is to look closely as to whether the product is the best for the client irrespective of incentives such as reimbursed fees. And if legal fees are covered it is important the client still uses their own solicitor independent of the equity release provider.
Dean Mirfin, regional sales manager at Key Retirement Solutions, says: ‘We are always wary with providers on the bottom line. Are they giving incentives, such as help with the survey or legal costs? That’s all very well but at the end of the day, what does the client end up with in their pocket?’
Clients also need to think about their circumstances in the future. They will need to know they can sell their house if they want to move. If they want to take the scheme with them they need a provider who will allow this, or if there are any penalties when they sell up.
Other areas a client will need to consider are any State benefits they are entitled to. Income from equity release schemes may also affect these especially if these are means tested. Also if clients have opted for an annuity income and income is fixed the real value of that income will reduce if inflation increases.
If clients are wary of negative equity, look for ‘no negative equity’ guarantees. These guarantee the client will not owe more than the value of their property. Hodge Equity Release offers this on its mortgage option as do Key Retirement Solutions and Northern Rock and Norwich Union on their roll-up loan options.
The right choice
A fair amount of research and fact-finding therefore needs to be done on these products. It is too easy for clients to see the amount of money they can get as the bottom line in their decision making.
But the real value an adviser can provide is in helping the client to plan how to use their funds in the most efficient way. Once that equity has been drawn down it cannot be taken again.
King warns: ‘Advising on equity release is time consuming. From an adviser’s point of view they would have to add value to the sales process from the funds being released. It’s not what the individual draws down, but the reinvestment of those funds ‘ it is all part of the retirement package.
‘There is a lot of IFA education to be done in this market. It is easy to use one of the established lenders when it might not necessarily be the right product for the vendor. It is still a reactive rather than a proactive sale.’
Basically there are a lot of points to consider, but most people stop at how much they can get. The bigger picture is that if they do not plan properly in two years’ time it could all be gone.
Mirfin says: ‘The whole issue is to break down their short, medium, and long-term needs. Short term is: ‘If I give you a cheque today, what would you be going out and spending it on immediately?’ Medium term is: ‘Over the next five to seven years, what expenses are coming up, for example, the car needs changing, or has a big wedding anniversary coming up.’ It is simply making the client think not just about what they want to do today, but over the long term. How long do they want this money to last? People’s needs change.’
Mirfin makes the point that while today the client may want to pay the money to pay for holidays, in 15 years they may need long-term care.
‘They may want to invest the money to get income now, but they might also have to think about using some of that money for long-term care, or even to look at the long-term care position now. Most clients have a good idea of what they want to achieve, but don’t know how to go about it.’
This is where the broker adds real value and ensures equity release truly means a release from financial worries.
Stephanie Spicer is a freelance journalist
The two main types of equity release are home reversion and home income plans.
The amount the client receives depends on both their age and gender.
Clients must not neglect their long-term needs ‘ such as the cost of care ‘ when releasing equity.