This year, members of the financial services industry were anticipating April as after several years of hard work, home-reversion schemes became fully FSA regulated from April 6.
Full regulation of home reversion has taken longer than for lifetime mortgages, where regulation was introduced on M-Day in October 2004. The industry, led by Safe Home Income Plans, as well as major product providers such as ourselves, have campaigned long and hard for the equity-release playing field to be levelled by the introduction of comparable regulation.
Now advisers can review both main types of equity release safe in the knowledge that consumers who choose either plan can get full protection from the regulator.
You might well ask why. After all, according to Ship, home reversions accounted for fewer than 7 per cent of equity-release products sold in 2006. Surely, it would be simpler to phase out the plans altogether and concentrate on regulating lifetime mortgages?
This is not the case. Home reversions were the original equity-release product and lifetime mortgages do not suit all potential equity-release customers.
Reversions are useful for a wide variety of customers and market circumstances. They comprise a small percentage of the market but they have a right to life.
But let us take a step back before diving into this topic. When you first talk to a customer about equity release, you do a detailed fact-find to ascertain if they are suitable candidates for the product. Questions should include:
– Have they considered downsizing?
– Is this something they have discussed with their families?
– Are they on benefits that may be affected by the payments?
– Will their tax position be affected?
– How important is it for them to leave a legacy?
– Having worked their whole lives to pay off a mortgage, will they be comfortable accruing additional debt?
– What are their views on future house price inflation?
Not only will these questions give you an idea of whether they are suitable equity-release customers but they should give you an idea of what type of plan to recommend.
Home-reversion schemes involve the client selling all or a percentage of their property to a product provider in return for a sum of money.
A lifetime mortgage allows a client to borrow money against the value of their home and interest rolls up until the property is sold when they die or go into long-term care.
People who particularly want to leave their family a legacy may find that a home-reversion plan is their best bet. They can choose to release a fixed percentage of the equity in their property, safe in the knowledge they will never owe more than this percentage of the value.
If it becomes apparent that your client has not discussed the issue of inheritance or equity release with their children, you should suggest they do.
Taking into consideration their general health, age and family history of mortality, you may gain insight into what type of equity-release plan is most suitable for their situation.
A fit, healthy 65-year-old who has family members who have lived to 90 may find a reversion plan is best. Those who do not believe they have many years left but want to make themselves as comfortable as possible may be best suited to a lifetime mortgage.
These factors are simply a guideline and a client who is frail at 65 may well live to be 95. However, all indicators as to which type of equity-release product is likely to be best should be considered.
Clients will probably have an opinion on whether the housing boom will continue or we will hit a slump. People who are convinced we will see double-figure house price inflation may want to choose a lifetime mortgage and avoid reversion.
According to the Institute of Actuaries, the amount repaid under a lifetime mortgage is likely to be less than 35 per cent of the value of a property that has increased by 45 per cent over a 10-year period.
Credit is a part of life today and many of us spend our lives working towards becoming debt-free. Many of the older generation find being in debt particularly worrying. If a client falls into this category, you may want to recommend the sale of a portion of their property (home reversion) rather than a loan against their home which accrues interest (lifetime mortgages).
Equity release is meant to enhance a person’s retirement and if they are going to spend their final years worrying about repaying the loan, it is not worth it.
In a market where the Institute of Actuaries says 45 per cent of retirees have inadequate retirement income but are likely to be equity-rich, there is space in the market for both these products. It will be interesting to see if home-reversion plans become a more popular choice.