Sub-prime mortgages and home information packs will be recorded as product victims of turbulent times and when the winds of change begin to blow we can expect new innovation as replacements. However, as financial constraints mimic times of old is it possible that financial products of the past, much like the Wispa chocolate bar, will have their time again?
When considering the equity release market, I believe there is a firm contender. Back in the 1960s equity release was about people using their home to provide a pension in the form of a Home Income Plan; a house annuity for want of a more accurate description. Financial considerations hinged on making ends meet. The cost of living in real terms was higher than inflation and Government help for the poorer pensioner was limited. The plans’ popularity was increased by the Government’s MIRAS (mortgage interest relief at source) tax relief, which was available until March 1999, and meant clients received specified tax relief on mortgage repayments.
Home Income Plan clients mortgaged their property for part of its capital value and used the proceeds to buy an annuity. This annuity, after paying the mortgage interest, created an income for life and, with MIRAS tax relief applied to mortgage interest on loans up to £30,000, often this income for life was increased significantly.
Home Income Plans also represented a favourable alternative to their Reversion Income Plan counterparts. These latter schemes, which required clients to sell part of their home instead of drawing a mortgage, ran the risk of affecting clients’ eligibility for means-tested State benefits and offered a less attractive Income Tax position.
However, as the economy grew stronger and inflation declined, the cost of living in real terms decreased and house prices began to rise. Clients in the early 1990s, therefore, no longer required a monthly income option to help make ends meet, preferring an option to access capital in lump sums to suit changing lifestyle opportunities. The move away from Home Income Plans was cemented in 1999 by the Government’s decision to cease MIRAS tax relief and by falling annuity rates resulting in decreased payments that were unable to cover the mortgage interest.
With increased equity in their homes, clients required an updated type of equity release plan, and lump sum lifetime mortgages grew in popularity, with Norwich Union offering the first mainstream product through its Capital Access Plan in 1998. These plans allowed clients to release large amounts of capital from bricks and mortar to spend and invest as they chose, free from the tax implications of annuities.
But times have now changed. House prices are no longer increasing at the rate we became accustomed to in the 1990s and the cost of living in real terms is once again on the rise. Equity release clients are taking stock of their financial situation and redefining its use.
The growth in drawdown schemes is no coincidence. Reported to have increased in popularity by 12% year on year in SHIP’s Q3 results, these products represent a modern day regular income model for equity release clients affected by the credit crunch. As part of a lifetime mortgage, flexible drawdown options offer clients the opportunity to use their equity release plan as a virtual bank, drawing down minimum amounts of £2,000 whenever they require it. Interest is only accrued on the drawdown amount and is not taxed. In this sense drawdown products can be used for regular monthly income, similar to that offered by an annuity but with greater flexibility.
As the economy shrinks and grows, and as individuals assess their financial security and needs, the use of financial products changes. In some instances products become redundant and are unlikely to be revived and in other instances the benefits they offered once can be offered again. Home Income Plans materialised in a time when they were required to make ends meet. As these times come round full circle their revival within the guise of drawdown schemes offers all the evidence required to reconfirm the timeless importance of equity release for retirement planning. n
Jon King is managing director of Hodge Lifetime Release
