If imitation is the sincerest form of flattery, then the UK equity-release market has much to be proud of.
Since the first home-income plan was launched in 1965 by Julian Hodge Bank, the market has grown to around £1.2bn and estimates from the Institute of Actuaries indicate that it could reach £5bn in the next 10 years.
In my role as chief executive of Safe Home Income Plans, I was recently invited to speak at the Sequal conference which was held in Sydney, Australia.
Sequal stands for Senior Australians Equity Release Association of Lenders and models itself on the structure and governance of Ship. Conscious of the need to establish safeguards for clients, it places great emphasis on its 10-point code of conduct which contains a guarantee of no negative equity and insists on independent legal advice.
The Australian Securities and Investment Commission provides a limited watchdog role, mainly targeting misleading product presentations or terms and conditions, rather than the more formal regulatory framework seen here in the UK.
However, it is interesting to note that the Australian government is primarily concerned that potential applicants should investigate the impact of reverse-mortgage schemes on state benefit eligibility and offers a phone-based advice service, Centrelink, which advises clients on this aspect of equity release.
The Australian equity-release market is still in its relative infancy, with the first reverse mortgage completed in 2001. This has meant that Australian pensioners can reap the benefits of lessons learned from the UK.
With this experience, it is unlikely that the Australian market will allow a situation to develop similar to the flawed equity-release schemes of the late 1980s, which gave rise to Ship.
Equity release has come a long way from those dark days and is becoming a mainstream financial planning product due to complementary factors combining to create the ideal conditions for this market to flourish.
First, the global population is ageing. People are living longer, healthier and more active lives. The number of people aged over 80 is predicted by the Government Actuary’s Department to rise by as much as 50 per cent to over five million by 2031. It is not out of the question that the non-working population, including children and pensioners, will soon outnumber the total of people working.
This demographic disparity brings with it a looming financial consequence for tomorrow’s senior citizens. Already in the UK we are on the cusp of a pension crisis. The Turner report in 2005 said 38 per cent to 43 per cent of pensioners could be struggling to make ends meet. This pattern is replicated across much of the developed world.
There has been phenom-enal property price inflation over the last decade, with average UK house prices doubling since 1996, according to the Halifax house price index. This is also a global trend. It is estimated that over-55s in the UK hold over £1trn of equity in their homes.
The Australian reverse-mortgage market, like the UK, has seen extraordinary growth of 46 per cent over the past couple of years. Total lending remains small at just over A$1bn compared with £1.2bn in the UK but this is from a standing start.
Accountant Trowbridge Deloitte predicts that the Australian reverse mortgage market will be worth as much as A$15bn by the end of the decade.
The number of product providers has leapt from three to 15 in the last two years and, unlike the more circumspect UK lenders, reverse mortgages in Australia come from a wide variety of institutions ranging from banks to credit unions and specialist providers.
The market is dominated by drawdown-type plans, a trend we are starting to see develop in our domestic market. Unlike UK clients, there is strong interest from consumers in income products. The typical rate for a reverse-mortgage product is around 8 per cent, making it more expensive than in the UK where the typical interest rate is around 6 per cent. However, it should be noted that the Australian base rate is also considerably higher at 6 per cent currently.
There are areas of common concern that Australia shares with the UK and other markets. Intermediaries – or financial planners as they are known – have been slow to start advising clients on this area, with direct salesforces and mortgage brokers dominating distribution. However, there are indications that this is set to change as clients demand more information on the increasingly wide range of schemes that are available to them.
The Mortgage Industry Association of Australia, is working to establish its members as a trusted source of advice for clients on this area. Advice checklists similar to those introduced by Ship this year are being devel-oped, as are industry-s pecific qualifications.
Our Australian counterparts have been quick to recognise the increased use of equity release within global strategic retirement planning. The financial services industry has responded at an incredible rate to meet this increased demand, with new products, new providers and new advisers entering the market.
The founding fathers of Ship would be heartened to learn that another country has adopted the principles that have guided our industry from strength to strength in the last 15 years.