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Enhanced performance

The expertise required to advise on equity release is magnified when dealing with clients who may qualify for enhanced deals, says Gregor Watt.

The problems with the equity-release market are well known. The product suffers with a poor reputation and there are not enough advisers qualified and willing to give advice despite the reported growth in demand.

Safe Home Income Plans expects new sales worth 1.7bn by the end of 2007 and figures from research company Datamonitor suggest that the market could be worth 3bn over the next five years.

Both Ship and individual lenders are concerned about the low numbers of advisers working in this area.

Ship chief executive Jon King says: “More confidence needs to be instilled in the IFA community. Demand is clear and now it is up to the industry to ensure they have access to appropriate, expert advice as well as great value products.”

Prudential director of lifetime mortgages Ali Crossley says: “If the number of advisers coming into the market does not continue to improve, it will not realise its true potential.”

If anything, the problems are magnified when looking at enhanced products. Providers of enhanced equity-release products say for many advisers, who only write one or two equity-release cases a year, expecting them to keep up to date with the details of such a niche area is a big ask.

Partnership Assurance chief executive Ian Owen says: “I think there are three problems with enhanced equity release. First, there is the lack of availability. Partnership is one of a small number of providers that offer enhanced equity release. Then there is a general lack of awareness among advisers. Also, I think the population as a whole, opinion formers and the media are only just getting to grips properly with equity release, let alone the idea of enhanced equity release.”

Owen says in the same way many people do not take out enhanced annuities they may be eligible for, those who are looking at equity release may not realise they could get a much improved loan if they suffer from ill health.

It is difficult to estimate how many people could qualify for enhanced equity release but do not apply for it. However, the figure for annuities is around 40 per cent of all annuitants who could apply for the higher rates. Owen says because the products are marketed at the same age group, the situation could be just as poor for equity release.

Owen says: “Just as on the pension side, where such products have been available for much longer, we have a situation where 40 per cent of people could qualify for the enhanced version and do not take it.”

The main advantage of enhanced equity release is the ability to unlock a much bigger percentage of the value of a client’s house than is typically available. If clients do not need to borrow the maximum available to them, then enhanced equity release is probably not the product for them. However, if they do, it is a very useful option.

Owen says: “If they are wanting to take as much value out of the property as possible, the enhanced option is a good one. For people forced to take early retirement, for example, because of ill health, they may be in a situation where they have not made sufficient retirement provision and may want to take as much as possible because of that.”

In Retirement Solutions chief operating officer Gavin Howard says: “If you are a 70-year-old with the health of an 80-year-old, you can release a bigger portion of the value of your property.”

The difference the enhancement can offer can be substantial – in some cases more than double the amount that can be borrowed. Owen says the Partnership lifetime mortgage, launched last month, could typically offer loans of 30 per cent more than borrowers would otherwise be offered but it could be higher than this.

“A male aged 60 in good health would be able to borrow around 18 per cent of a property’s value. But for someone at 60 with diabetes, who is overweight with history of heart attack and a smoker, we are talking quite substantial uplifts,” he says.

Due to the enhanced terms available to borrowers, it is important to get the underwriting correct.

Partnership products roll up the interest, which is added to the loan and repaid on death, so anyone who outlives their expected lifespan could find the amount owed increasing faster than expected. However, as with all Ship members, there is a no-negative-equity guarantee.

In Retirement Solutions’ version includes a pre-agreed amount for the total of the loan, so all the risk is transferred to the lender.

Both lenders say it is imperative to get the underwriting correct but it is not an intrusive process. All the lender requires is a detailed questionnaire, filled in by the borrower, and permission to get a GP’s report. Howard says: “The underwriting process is very non-invasive.”

Partnership relies on IFAs as the main source of its business and Owen says it is working with specialist advisers to improve knowledge and awareness of these products.

In Retirement Services operates along different lines. It has links with several networks and smaller IFAs which can refer any equity release case to it to deal with.

Howard says: “In light of the FSA’s words on how you should only be advising on this area if you are a specialist, we are finding this option popular. It is a lot of specialist information to keep up with.”

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