In the current economic climate, it has become second nature to witness, and in some cases disregard, endless reports of house price rises and declines. However, by looking at the
number of mortgages advanced, things are put into context, and the wider
remortgage market has reported a 63% drop year on year. Not surprisingly, the
equity release sector is facing tough times too but declines in total equity release
lending have been far less dramatic – down by 22% (Source: SHIP) in 2009.
Within the equity release arena itself, it may be surprising to hear that there are
in fact areas weathering the storm rather well – notably the increased demand for
home reversion schemes. Hodge Lifetime has witnessed its own applications for
these products increase four-fold over the last year and when the layers are peeled
back there are numerous contributory factors accounting for this.
For the older homeowner reaching retirement age, standard remortgaging
can be increasingly difficult to acquire. Many turn to equity release and use the
value in their property to pay off their existing mortgage loan and fund them
through their retirement years.
Of the lifetime mortgage products on offer however, high LTV products are disappearing from the market, as decreasing house prices make SHIP no-negative equity assurances increasingly hard to fund. The higher the LTV, the faster the loan – plus the rolledup interest – reaches the house price value, the sooner the no-negative equity guarantee kicks in.
Home reversion schemes allow homeowners to receive a larger sum of money the older they are and thus it is unsurprising that Hodge has seen the age of single home applicants increase. Unlike lifetime mortgages, reversions offer a larger lump sum and the benefit of no additional interest repayment upon death.
Homeowners who do opt for home reversions can also enjoy the set-in-stone guarantees that come with them – such as being able to remain in their home for life. The guarantee of the percentage of their home that will be left to their children and dependants and the potential
to reduce Inheritance Tax bills is also an attractive option for many. Compared to
lifetime mortgages where interest rolls up until death, home reversions remove the
uncertainty over both overall debt and the potential for decreasing house prices
– a fear which is incredibly acute for some clients.
Although home reversion schemes mean that homeowners effectively sell a percentage or all of their property to a home reversion company, the benefit of being able to live in the property rent-free means that they are often the preferred option for many clients, especially combined with the knowledge that they will benefit from any house price inflation
Reverting to type on the equity still owned. As a slice of the property is now owned by a reversion company, regular house inspections also take place to ensure that the client is
maintaining the property to a satisfactory standard; something that can help many
clients maintain the fabric of the building. Clients will also receive help in selling the
home in later years and many plans have the added benefit of included insurance
cover.
As a result of the constant innovation in equity release products, modern reversion
type schemes also allow homeowners to sell a further percentage of their home,
should they require additional funds in years to come – a great opportunity if
house prices have increased since the initial sale. IFAs who are authorised to
deal with this type of business will find that they are able to stand out from others
who may only be recommending lifetime mortgages.
Following the regulation of home reversion schemes in 2007, IFAs are now obliged to advise on both types of products; however, those who qualified before this deadline can select what they advise on and may wish to only alert clients to the suitability and key features of lifetime mortgages, choosing not to dip their toe any further into the waters. By considering the qualification in home reversions, all IFAs could advise on what is proving to be a popular area of equity release and could widen the market opportunity in the future.
With qualifications now fully in place and benefits becoming more prominent, more clients are looking to home reversions as a means of generating cash. The market looks set to grow and advisers are best placed to maximise on the opportunity by investigating the appropriateness of home reversion products for all potential clients, encouraging and supporting the growth of
such schemes throughout 2010.
Jon King is managing director of Hodge Lifetime
