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Don’t get locked out

Falling house prices mean that would-be equity-release clients could be well advised to make their move sooner rather than later.

But consumer perception of the impact of the credit crunch and a general lack of confidence could mean clients are biding their time, even if this reduces the amount they will be able to borrow.

Newcastle Building Society head of equity release John Digman says: “Equity release is a very emotional thing and some customers are sitting on the fence. We had one client last week who said they would wait a year to see what would happen with property prices.”

In the year ahead, what this client and others similarly hanging fire are likely to see is the value of their home and their equity fall.

The Council of Mortgage Lenders is predicting a 7 per cent drop in house prices this year.

The credit crunch has had severe effects on the traditional mortgage market but the equity release market has seen solid lending volumes, some of the most compet-itive rates historically and, so far, only one specialist lender being forced to stop lending for a period.

A recent report from Defaqto, Equity release – entering the mainstream, believes there is considerable latent demand for equity release.

The report predicts growth in the sector in the medium term at least and, so far, shaky consumer sentiment has not fed into falls in equity-release sales.

Many lenders and advisers are reporting strong figures, with Prudential, for example, seeing total mortgage advances in the first quarter of this year of 51m, the highest quarter sales since it entered the market in 2005 and up by 50 per cent on the first quarter of last year.

Norwich Union head of post-retirement Anthony Rafferty says: “We have had a really good start to the year and have not seen a dip. People are looking to borrow money and are turning to their houses to do so.”

Key Retirement Solutions business development director Dean Mirfin says the firm’s sales figures for last month were the best it has ever seen. “We are seeing very high conversion rates from responses from new clients.”

KRS’s experience suggests that people now enquiring about equity release are more serious.

Clients who are hanging fire are probably the sort who would or should not go for equity release anyway, regardless of the economic backdrop, says Mirfin.

“If people are able to wait a year before going on to release equity, then my feeling is they probably do not need it,” he says.

Against the falling market, thorough fact-finding and choosing products with no-negative-equity terms become even more important to minimise risk to advisers and clients.

Digman says: “We spend lots of time fact-finding, looking at property prices in the clients’ areas to set the benchmark. Taking the emotional element out of it is a key part of the advice process to help clients answer the question of whether this represents value for money or not?”

In terms of how the credit crunch and falling prices might affect product sales, the full picture will not emerge for some time yet.

One argument suggests that home-reversion products will enjoy more popularity in a falling market as they allow clients to sell all or part of their home in return for income or a lump sum, as opposed to borrowing money against it as they do under lifetime mortgages.

As prices fall the amount of equity will fall, which could have an impact on the willingness of some people to consider equity release.

Prudential’s equityrelease index, which tracks the amount of equity that retired homeowners in England and Wales have in their properties, is already showing a slowdown in the rate of increase of equity levels.

Latest figures from the Pru show an increase in the amount of equity of 2.27bn, just 0.3 per cent, between October 2007 and February 2008, compared with June to October 2007 where the corresponding figures were 18.16bn and 2.5 per cent.

But Prudential business director of retirement income Keith Haggart says it is important that retired homeowners do not lose sight of the bigger picture.

“Most have built up a significant amount of equity in their homes over a number of years so even if property prices do fall, many still have a huge amount of wealth in bricks and mortar,” he says.

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