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Equity release

  • 10/03/2003
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The latest Power Hour found several barriers stand in the way of significant growth, but the market is satisfying a real needBy Alex Broad

Alex Broad: In 2002 SHIP members took on £651m of new mortgage business and £201m of new reversion business, showing a 49% increase on 2001. How much more can the equity release market grow?

Mark King: I think it has only just started. A combination of lower interest rates, lower annuity rates and poor stock market performance, means people are finding it necessary to release more capital and I think it is becoming a viable alternative. The response that I get from IFAs is that we are just at the tip of the iceberg, and that growth will be considerable in the next few years.

Ian McNeill: There is one important factor for increased growth ‘ the increase in the value of the properties that creates the value of the equity. But the other factor I think will be important will be changing attitudes by the older owners. If they feel they must leave their property as a legacy then they may hold back. If they think it is their money and they want to spend it ‘ and their children are quite happy ‘ then I think we could see a great increase.

Steve Sandiford: Do you detect any change in attitude between homeowners and their offspring?

Ian McNeill: I saw some research about five years ago which indicated that the children were keener for the parents to spend it themselves than the parents were.

Rob Clifford: The influence of children is important ‘ 16% of our equity release work is as a result of children recommending their parents look at the scheme. I think there is a significant influence.

Sally Laker: Potential equity release clients do have to be handled in a different way and the children have to be party to this so everyone knows what is going on. I think that is why lenders have not jumped in because they can see there is a lot of taking care of the client, there is a lot of making sure everything is right. Obviously there is reputational damage if it all goes wrong. Hopefully lenders will be able to get past that reticence and come in and make it a bigger market.

Alex Broad: What are the main obstacles that remain?

Vincent Cable: In my constituency there is an enormous number of people who have equity of between a quarter and half a million pounds in their homes and these are people facing diminishing pension prospects and a rising cost of care. There are two fundamental obstacles ‘ one is that most of the people we are talking about are frightened, conservative in their financial habits and deeply suspicious of the financial services industry. That has to be overcome. The other problem is that we are facing changing dynamics in the housing market. One is going to have to sell this product in a world of share depreciation rather than share appreciation. It’s a question of how these products will survive and grow in a bearish market.

Steve Sandiford: I agree. The sort of comfort that people will be looking for from equity release schemes will be even more important if that sort of market comes about. People have fairly long memories and we do not want to rake up too much of that. But there is no question that is what people think of when they think of this type of scheme, and the various providers are going to have to work hard, and some already are, to reassure people and give them guarantees.

Bob Wright: The legacy issues of the 1990s are sometimes more in the minds of professionals than customers. We surveyed around 1,000 existing customers recently and over two-thirds replied. 81% were either satisfied or very satisfied with the product they have and 83% said they would recommend the product to other people. The sales processes that are linked to marketing equity release, certainly among SHIP members, build in a lot of checks to ensure the customer is aware of the situation they are entering.

Mark King: I find the problem is often with the solicitor who is acting for the vendor. They are the people who keep flagging all the obstacles to the people who actually want to go ahead and do something.

Bob Wright: You are right, but that is the role we have given to solicitors in the process. That is what we are asking them to do. I think that is something we will see change as the market moves forward. Now most reasonable size firms of solicitors will have handled such cases and know a lot more about them.

Ben Marquand: Are you just waiting for the good news about equity release to filter through, or do lenders have an active programme to educate solicitors?

Bob Wright: We do try to educate through affinity groups but you’ve got to remember this is an immature market ‘ it only started to take off in large volumes three or four years ago and has all the characteristics of a market that is not particularly mature.

Dean Mirfin: From our point of view the equity release scheme itself is a small part of the advice we give. For us about 70% of the job is about what happens to the money as opposed to how we raise the money. So whatever happens to property values in the future, there are plenty of other things outside equity release that are ‘jeopardising’ inheritance (such as long-term care and Inheritance Tax). When it is looked at in isolation people can find holes in it. It is that second phase of how you are advising on it that is important.

John Malone: Where do you see it fitting into advising about people’s retirement provisions?

Dean Mirfin: Many people we see do not have enough money to meet their needs, but they do not have a lifestyle outside of that and that is where equity release, at the moment, is bridging the gap. The other factor you have got from the older client’s perspective is that they are living longer ‘ if you take the example of when someone retired 10 years ago, they took the cash and bought a car thinking it would be the last car they would ever buy. Now it is draining their resources. You can understand why people aged 75 are starting to look at this. The disappointment for us as an IFA is that you have only got two or three choices in terms of schemes. Every time we talk to providers who are looking to launch products it is clear there is a lack of innovation in terms of looking at what people need.

Ian McNeill: In the US they have had an equity release product with drawdown for years, but the product just has not really come across the pond.

Dean Mirfin: When you mention that you do equity release for a living most people do not have a clue what you are talking about. In Canada and the US it is so popular it is looked upon as the norm. There is an expectation they will do it because they want to, not because they have to.

Bob Wright: There is a political dimension to flexible products though, in that they are difficult to do in the UK because you have to put capital behind. If you have a customer who can notionally borrow £100,000 and they decide they only want to take £30,000 it would be great to say, ‘well you can come back and get the other £70,000 anytime you want to.’ For a lender to provide that facility they would have to put capital behind the whole £100,000 at outset. Certainly the two or three major lenders on the mortgage side have all looked at trying to address this issue of making products more flexible, but it is difficult to do in practice.

Ian McNeill: Would you contemplate charging a certain fee each year which would cover the cost of it?

Bob Wright: Then the customer is paying a fee for something they are not going to use. I do not think that is an attractive customer proposition.

Dean Mirfin: You cannot underestimate peace of mind. One of the best case studies I have seen was two clients who I visited two years after they had come to us to find out what they had done with the money, how they had spent it. They had not spent a penny of it because they did not have to, but they no longer worry about money. They would have happily paid an annual fee that rolled up as and when they needed that money.

Mark King: I should point out that there is no reason why it [drawdown] cannot be done on a reversionary basis.

Jonathon Whiteley: Why are advisers and lenders still showing reluctance to enter the market?

John Malone: I think lenders are a bit nervous to get into the market and everyone knows once you get more lenders into a market they get more creative. We all know what happened with home income plans 15 to 18 years ago and the demoralising impact that had on many borrowers. I think one of the crucial aspects going forward is a regulated market, I welcome the segmentation in the market whereby only authorised personnel on the broking side are able to advise on equity release.

Andy Frankish: I agree. As a broker 95% of our business is from residential sales. We do virtually none of this type of business. I think to go out and sell this as a mass market product is wrong, particularly now. There’s a massive lack of understanding. Product knowledge is very weak, not only with solicitors but with brokers as well. It calls for the industry to be regulated in some way so not everyone can sell it.

Steve Sandiford: I do not think the industry can afford even a hint of a scandal.

Rob Clifford: Many IFAs are referring equity release business to us. One reason is the reputational risk issue ‘ do they want to be involved heavily in this area of the market? But primarily it is about specialism. It is about training and focus of consumer-facing advisers. I think it is refreshing that many intermediary businesses are saying we will only get involved with this area if we can give it a clear focus.

Vincent Cable: Every week potential borrowers trawl through the Sunday newspapers’ finance pages and that is people’s perception of how the market operates and that is what led ministers to argue that this kind of product needs to be regulated. Much of the satisfaction people have had has been in a bullish market for house prices.

Alex Broad: What are your main concerns at the moment?

Andy Frankish: The worry is that there are still people out there who are not giving customers the full choice. If that continues to happen, which way will the market go? We need regulation.

Bob Wright: Advice is envisaged in regulation. The way it has been laid down means there must be some analysis to identify which of the methods best fits the client profile.

John Malone: Looking at the issues the Government has to work with, regardless of who is in power, we have got an ageing community, we are under-funded. So what comfort can we take as advisers and innovators from politicians as to how they will address this situation that will be faced by millions of the electorate?

Vincent Cable: I think we should be saying that the underlying principals of equity release are great. This is matching real needs with the one big asset that everybody has. If we get a mechanism that is free from abuse then we can be going out and promoting it.

John Malone: And the Government of the day will do that?

Vincent Cable: That is essentially what it is working towards.

Sally Laker: I think it is important we get more expertise. If we have more expertise the conversion rate will increase. A worrying statistic is that by 2016 there will be more people aged over 60 than under 16. So I think it is important the market does mature, so there are more IFAs who are able to become experts. But they have to be prepared to see clients on an ongoing basis.

Edward Murray: A few of you have said we need to get more brokers and intermediaries aware of and educated in equity release, but how do you go about doing that?

Dean Mirfin: We have nearly 100 IFAs, brokers and solicitors who refer to us because they do not want to touch this. This is great for us but we would rather give it back to them. We train our advisers for two weeks on equity release: the effect it has on benefits, all the issues around care, educating their clients about what happens if they go into care regardless of equity release and what choices they have. Because the market is potentially so big we have no problems with promoting equity release. Also we should not underestimate the effort that current product providers are now making in helping IFAs and brokers anyway.

Alex Broad: What are your thoughts on the FSA’s decision to only regulate part of the market, and will consumers see any difference?

John Malone: I think there has been an enormous amount of pressure on the FSA saying you cannot differentiate. It is all or nothing. I will not say it will be a loophole but you are creating an opportunity, it must be all or nothing because that is what regulation is all about.

Ian McNeill: All codes of conduct and regulation try to foresee what could go wrong and prevent it. For example, the fourth point of the SHIP code ‘ no negative equity ‘ was not there originally, it was put in reaction to the appearance of negative equity. You have to remember it is often the unexpected that catches us out.

Alex Broad: How do you expect products to develop and do you expect them to be marketed towards the older customer or their children?

John Malone: I can see products coming out from lenders whereby lenders just amortise the debt and the borrower pays no interest back, so the capital then just rolls up. Therefore we are now talking about a lifetime mortgage, they go to the lender at 35 and will still have a debt with that lender when they are 85. I think that is the kind of innovation and creativity that will happen.

Andy Frankish: I do not disagree, but it will not happen at the moment because if you look at how much lenders are spending on the remortgage market. It will far outweigh how much they spend on that.

Sally Laker: It is a psychological change as well because there is a barrier that says by retirement age people will have paid the mortgage off. Now the equity in their property gives them the facility to take out more money through this kind of product, but there is still a psychological belief that they want to have the choice. I am not sure they are ready to roll that debt.

John Malone: I think external factors will determine development because there are millions of borrowers who possibly might not receive the expectation out of their endowments at that age. It might not be large sums of money, but there could be £10,000 to £25,000-worth of outstanding debt because their endowments have not been able to help.

Sally Laker: But don’t you think that is why they want to get to that point where, if they have nothing else, they have the house.

Claire Edington: I think that attitude will completely change.

John Malone:The 30 and 40-year-olds are changing now and I think it is the job of the adviser to say to the client, ‘these are the products we have today,’ but I can see the developments that will take place in the future.

Claire Edington: I think children are actually wanting their parents to take the money out and have a better lifestyle.

Mark King: We appear to be talking about people with children, ideally someone who does not have a direct descendent, but I believe over 30% of people aged over 60 in this country do not have children to guide them. If the bank has given them a lifetime mortgage they may have staff who are not properly qualified and certainly too young to not appreciate the problems that could come up in old age. I am not worried about old men ‘ they tend to be the money managers, the wage earners ‘ I am much more concerned about the old ladies.

Vincent Cable: Just a cautionary note for this enthusiasm for lifetime mortgages. I think it will happen for the reasons you have given, but always remember the backstop measure for the industry is repossession ‘ it has to be there. Once you are into the business of repossessing 80-year olds the industry is in terrible trouble and you are not going to do that. So there is a natural restrain which is going to stop this happening.

John Malone: If there is a guarantee the borrower will not have their property repossessed then I think then the industry has to put its whole position on the back of that. If that was to change it would then destroy the equity release market.

Bob Wright: It is written into the mortgage terms and conditions at the moment. If there is any negative equity it means risk is transferred from the client to the lender and that is why it is a premium product. There is a premium written into the product and lenders have to provide this.

Vincent Cable: Is that a sustainable guarantee?

Bob Wright: Yes, because if we were to go into difficult trading conditions and there was long-term depreciation in house prices then people would withdraw from offering new business.

Ian McNeill: Would it help the customer understanding and trust if that language altered? Instead of using no negative equity the words no possession. Would a change of language help?

Bob Wright: I am not sure. We have spent a long time educating people in the language we have got which is one of the issues I have with lifetime mortgages. Do you call it a lifetime mortgage, or do you call it an equity release? If you are talking generically about people releasing money from property we will have some problems with lifetime mortgages because reversions are not a mortgage and they are an important part of the industry.


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