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Has NU opened door for homereversion plans?

Norwich Union has become the first big name to enter the home-reversion market with the launch of its product last week.

Yet the timing of its entry may raise some eyebrows after home reversion suffered one of its worst years in 2004 with total sales of 41m.

Safe Home Income Plans says 96.5 per cent of equity-release business in the last quarter of 2004 was for lifetime mortgages rather than home reversion.

Key Retirement Solutions received 176 applications for its Orchard home-reversion plan in the third quarter compared with 7,030 applications for lifetime mortgages.

Julian Hodge Bank managing director Jon King says: “The reversion business has been in decline. It hit rock bottom last year.”

So what makes Norwich Union think this is a good time to launch a reversion scheme? Head of personal finance Russell Hughes says: “We have core experience in equity release with lifetime mortgages. This is an extension of these competencies. Reversion offers new or different advantages.”

Home-reversion plans were traditionally the most important part of the equity-release market. In 1965, the first reversion income scheme was launched by Home Reversions (later Hodge Equity Release). Cash reversion plans were introduced in 1978 by JG Instrup & Co.

But then a flurry of unsafe plans, including investment bond and roll-up plans with variable interest rates, met with a barrage of bad press and were eventually banned in 1990. This had a knock-on effect on plans that could offer tangible benefits to an older generation of home owners.

When the FSA took over regulation of the mortgage market from October 2004, the reversion market was omitted from the rules, which was seen by many as a Treasury oversight. In September, a Treasury consultation paper, Defining Home Reversions, made a commitment to regulate home reversion alongside lifetime mortgages.

KRS business development director Dean Mirfin says this has gone some way to building confidence in the sector.

In the meantime, Ship put together its own code of practice for home-reversion schemes in October covering advice, sales, complaints and compensation. The code is supported by a complaints board and offers Ship home-reversion customers the highest level of protection until this part of the equity-release market comes under full FSA regulation.

The NU product has been designed with regulation in mind. NU will only take business from regulated IFAs and mortgage advisers and the product comes with guarantees to protect customers’ interests.

An inheritance protection guarantee is designed to protect the value of the customer’s estate in the event of the plan ending through death in the first four years. It also applies if the customer needs long-term care in this period.

A house price inflation guarantee makes sure the customer benefits from rises in the value of their property. When the property is sold, if the price has risen by more than 7.5 per cent above inflation each year since the start of the plan, the excess is shared equally with the customer.

Hill Martin mortgage expert Steve Smith points out that although customers can take out a scheme for up to 100 per cent of the value of their home and remain living there for the rest of their life, he still sees problems in explaining the product to potential customers.

Smith says: “In effect, you are selling your house. A lot of people find this difficult to understand. The deeds of the house are transferred to the provider. This is a big hurdle to overcome when explaining home reversion, especially to an elderly customer.”

He also suggests the scope for reversion to grow is limited as surveys conducted by providers, including NU, have shown that people tend to release equity to fulfil a dream such as buying a fast car or an expensive holiday rather than due to pressing financial needs.

Prudential director of lifetime mortgages Ali Crossley says: “The home-reversion market is definitely not one the Pru expects to grow. What the lifetime mortgage market really needs is something that offers flexibility and puts the customer in control.”

The need for more flexible products was echoed in an Institute of Actuaries’ report earlier this year, which suggested that more big names need to enter the market in order for it to grow.

King says he welcomes NU’s entry both from the point of view of a competitor and a founding member of Ship. However, he admits there is a certain degree of frustration that reversion is not recognised for its potential benefits.

He says: “Reversion has a guaranteed amount for the customer once the property is sold. With a lifetime mortgage, you do not know what you are going to get. Reversion is fixed. There is lots of potential, too, in terms of inheritance tax planning. Your home is the biggest asset class that people have but do not use.”

While Pru appears to have ruled itself out of reversion in the near future, Mirfin believes the entry of a big name will open the gates for other lenders to enter the market. He says: “The reversion market has lacked two things – new entrants and big names. Following this announcement, a number of lenders will look at the market with interest.”

King says: “In the late 1980s, companies like Allied Dunbar were driving the market. We need big names like that to come back in to help drive sales.”

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