Be it corporate event, dinner party, coffee meeting or casual conversation over the garden fence, you will find it difficult to steer away from the inevitable discussion: when will house prices stop their descent? This question sparks heated debate, as Britain’s past compulsion to sink money into property for a guaranteed return comes full circle. However, with an ageing population and an increased need to enhance retirement income through equity release, this recent house price decline is perceived to be as much of a concern to today’s retired as to today’s full-time employed. Yet, as one would argue that negative equity for younger homeowners is of little concern unless they are planning to sell their property, lower house prices for retirees considering equity release is misunderstood as detrimental.
A home’s value is important at two stages of the equity release process: the beginning and the end, yet it is relatively inconsequential between those two points. The valuation at the start of the process will determine the initial lump sum that can be drawn from the property, and the future movement in prices will determine the eventual amount of equity left in the property at the end of the process.
However, it is the years inbetween and the choices made during this time that determine the client’s experience of equity release. Like any form of financial planning, long-term commitments are influenced by many factors. Basing a large financial decision on the performance of one factor alone is ill-advised.
Today’s equity release plans differ considerably from older schemes. Today’s clients are expected to live longer and require a flexible approach to their finances. What they need from equity release has changed – from a single lump sum payment for large expenses to smaller, regular payments, supplementing income throughout retirement. And it is from this change that drawdown schemes have grown in popularity, and as a result, one can start to argue that falling house prices are inconsequential.
Drawdown schemes represented 60% of the equity release market in Q3 2008 (SHIP) and their popularity has altered the advice required from intermediaries. With the central premise of equity release advice residing in the requirement to manage and reduce the final debt to an estate, this product feature means clients now only use the money that they require and are not saddled with debt from a one-off lump sum payment. Falling house prices therefore have a minimal effect upon clients who choose these products. While decreasing property prices will limit the amount that can be borrowed initially, those using drawdown schemes do not require a maximum loan and so remain unaffected.
The importance of reducing the final debt to the estate resides in all equity release advice, and diminishing house prices in fact aid in this endeavour. Protected by the SHIP ‘no negative equity’ guarantee, clients with these approved loans will never owe more than the value of their property and falling house prices will only serve to minimise their final repayments. Equally, when house prices begin to rise again clients have several options to ‘top up’ their loans with their homes’ increased value.
The cost of equity release to a client’s estate is ultimately not entirely governed by the value of their property, their choice of scheme or the guarantees they are offered, but instead by their life expectancy. The longer a client lives the longer the eventual debt and it is this unassigned factor that should be at the forefront of every client’s mind. Increasing life expectancy has dramatically changed the nature of advice for equity release and it is now re-mortgaging rather than house prices that will have the largest effect upon the client. Advisers and clients need to be aware of the regular changes to interest rates and the cost of redemption penalties, which will remain of the utmost importance over the coming years.
However, for clients who remain pessimistic for the future of house prices, equity release could still be for them under the guise of home reversions. By securing a home reversion deal now, the client locks into equity from their home at or near its peak, and subsequent falls will only result in the provider losing money. n
