Hare-Scott: Equity release plans are products which enable homeowners to enhance their lifestyle in retirement. The money raised can be used to increase income or to fund one-off purchases. In this regard, many retired people have sufficient money for meeting their day-to-day expenditure but cannot finance one-off items like property improvements, cars and holidays. Increasingly, many homeowners are using equity release in order to provide financial support for their families, for example, to get their grandchildren on the housing ladder. Some people even use equity release in order to trade up in order to have a more suitable home in which to enjoy their retirement.
Mirfin: If you look at the popular uses, the typical clients tend to be financially okay – living week to week, living month to month they are OK. But what they are losing out on are all the extras that you need capital for, things like holidays, changing the car. In particular, the biggest reason consistently ever since we started is for people to do work on their house. Home improvement currently runs at 58 per cent of customers who deal with us. It is not necessarily for things that are essential and need doing but throughout their working life they have kept it looking good and done work on it when they wanted to and in retirement they’ve wanted to continue doing the same things. It can be used for something as small as recarpeting the house to new kitchens, bathrooms and conservatories. All the things they did when they were working they want to continue into retirement.
Rafferty: Our own consumer research has shown that as many people use equity release to purchase a new car, 32 per cent, as to generate income, 33 per cent. The most common uses for equity release are home improvements, 72 per cent, and funding a holiday, 40 per cent.
Haggart: Our research combined with actual experience suggests that is very much a combination of the two, with customers using the proceeds of their equity release scheme for a variety of reasons that include supplementing their income, paying off their outstanding mortgage, helping their children/ grandchildren get on the property ladder, home renovations and paying for holidays among other uses.
A number of new entries to the market and existing lenders have said the equity release market is on the verge of a tipping point where it becomes mainstream. What needed for this to happen?
Hare-Scott: The equity release sector is already in the mainstream in that it is well established, constantly in the media and growing. It is defying all of the trends in other areas of the mortgage market. There are many well known and secondary providers offering an extensive range of products and customers are spoiled for choice. It is possible to get a fixed interest rate for life at approximately 6 per cent pa and even secure a fixed rate with predictable or even no early redemption charges. Against such a background, the sector is set to expand as pension shortfalls become more evident. The comprehensive regulatory umbrella covering both lifetime mortgages and home reversion plans will provide increasing confidence to potential consumers.
Mirfin: I think it is consistently getting equity release to be seen more on the high street. One of the things we have been really focused on doing is working with a number of building societies so that they refer their customers to us for equity release. In the branches, they have got leaflets, posters, etc, so it is getting equity release more on to the high street so people see it everyday.
It is about making sure that the consumer is educated about what equity release is all about. It is continuing to ensure that anything that is reported about it in the consumer press is accurate and is informing customers in the right way – helping to inform them about making their own judgement.
Rafferty: Equity release is currently available on the high street through RBS and HSBC, albeit on a relatively small scale, as well as through a concentrated pool of larger intermediaries. In our view, the market conditions are ideal for equity release, given the current housing market and the changing face of society – including the so-called sandwich generation. To make the market more mainstream, it is needed for other big banks and non-equity release specialists to begin to offer advice on this product.
Haggart: The environment is certainly more conducive to lifetime mortgages entering the mainstream. We have a population who are living longer and who have an increasing responsibility to provide for their own income in retirement. We anticipate that people will increasingly look to their property as a retirement asset and we need to invest even more in education to dispel some of the myths surrounding the lifetime mortgage market. There is a basic need that exists for this type of product amongst an increasingly broad cross-section of the population. Innovative new products that are much easier to understand, as well as the no negative equity agreement for all Ship members’ products, combined with ready access to good advice, will create an environment in which demand can flourish.
How big a risk are sale and leaseback schemes to the reputation of equity release?
Hare-Scott: Sale and leaseback schemes are a disaster waiting to happen because elderly homeowners entering into such plans are in danger of losing their homes. They will do so if they cannot afford the rent or, worse still, if the landlord breaches the terms of any mortgage on the property. continued on p56Although this situation can arise with a buy-to-let product, sale and rent companies often portray themselves in their marketing as being engaged in equity release and openly look to secure more business with potentially vulnerable people either in or approaching retirement. Thus the equity release sector has been unfairly tainted, putting at risk so much that has been achieved in improving its image in recent years.
Mirfin: Huge. The whole concept of sale and rent back I don’t have a problem with. We don’t necessarily believe there is anything wrong with it but we do believe that it is a big financial decision and there needs to be structured advice around it. It also needs to be conducted in an environment where the consumer chooses it alongside other alternatives. For instance, if someone comes to us to talk about equity release we talk to them about other forms of borrowing, we talk to them about downsizing, we go through a whole raft of alternatives to make sure if they do choose equity release it is the route they want to go down. Sale and rent back is sold as being a very quick and rapid solution for people. That is the big concern we’ve got – how it is being promoted. A lot of these companies are promoting it as equity release. Equity release is a term that the FSA has done a lot of work on helping consumers to understand what it means. For that to be abused by the unregulated sector is a concern.
Rafferty: These schemes are a real risk. Sale and rent back schemes are excluded from appropriate legislation which could cause a problem to the sector’s reputation in the future. We are, of course, aware that these products do not fit within the pantheon of true equity release products but encouraging consumers to take this view will be a challenge.
Haggart: They are very different products but if lumped together could cause confusion. Working with Ship, it is important that we educate people sufficiently to establish the distinction. We do not offer these type of schemes and believe that lifetime mortgages offer more flexibility and can potentially give the customer more options. That is why advice is essential to help the customer to fully understand what is on offer and what’s right in their circumstances.
Are you surprised by the small number of IFAs who have so far passed the exams needed to advise on equity release?
Hare-Scott: Equity release is a specialist area and so it is appropriate that the training and competence requirements have been strengthened. An adviser is not only required to pass the exams, it is also necessary for his firm to secure separate permissions from the FSA to conduct lifetime mortgage and home reversion plan business. Furthermore, the FSA has understandably discouraged financial advisers from dabbling in the market. Against this background, it is not surprising that small IFAs are cautious about involving themselves in the sector. As a result, many are choosing to pass their leads to a specialist equity release advisory firm under a commission sharing arrangement until they have confidence to achieve the necessary qualifications.
Mirfin: A lot of people have taken the exams which is good news. There has been an increase in advisers who have looked to and are specialising in the sector. For a number of reasons, people are now looking at this market seriously. One is, of course, the fact that a lot of brokers are struggling with their core business and are looking for new income streams. With the growth in the market, through networks and other organisations, we have now got over 3,000 individuals who are registered to refer to us. What we are trying to do is help people who do not want to get directly into this market because of compliance worries, etc.
Rafferty: In our view, professionalism in the provision of financial advice is paramount and as such, all financial advisers should recognise certain standards, be held accountable through a recognised professional body and they must provide advice of a high quality, based upon the right knowledge and skills.
Haggart: To date, the growth of the equity release market has been niche, with the rise of the market specialist and the establishment of professional relationships to satisfy the requirement to provide equity release advice, which has helped meet some of the demand. We would like to see more advisers qualify and we have been working hard with them to highlight the opportunities that exist in the market but this is taking time to bed in. We anticipate as consumer demand increases so too will advisers’ interest in the market. Already, we believe the number of advisers taking equity release exams is on the rise, which is a great sign for the equity release market as a whole.