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IHT could be the key

Those advisers involved in, or thinking of entering, the equity release market should be encouraged by the recently published Safe Home Income Plans member survey.

Each year the trade body undertakes to ascertain its members’ opinions and it may well be helpful for the advisory community to have some sort of context brought to the headline findings. As a member of Ship, I should also point out that Bridgewater Equity Release takes a full part in the survey itself.

Firstly, all intermediaries and advisers involved in financial services have no doubt entered the new year with much to occupy their minds. Not least will be the decision about which sectors are likely to provide greater income and success throughout the next 12 months.

Looking at the runners and riders in the ‘Strategic Success Stakes 2009’, which include mortgages, protection, investment, pensions and equity release, there is clearly one favourite. Equity release as a sector could provide significant winnings and is one of the few areas tipped to grow in value in a year which is predicted to be one of the most challenging for decades.

Equity release providers at least seem confident that the sector can continue to grow even in the face of the current economic climate.

Ship members are predicting growth mainly off the back of falling interest rates for lifetime mortgage products. Home reversion growth is predicted to be less strong given that providers are pricing into their rates further expected falls in house prices.

That said, as soon as the housing market shows signs of bottoming out or indeed a recovery then I’d expect reversion providers to immediately reflect the change in sentiment in their pricing.

While falling interest rates for lifetime mortgages are cited as the main driver for growth in 2009 advisers and customers’ expectations need to be managed very carefully on this.

Rates may very well come down but it is highly unlikely that the recent significant falls in base rate will be passed on to new lifetime mortgage borrowers.

Broadly speaking the fixed rates offered by lifetime mortgage providers track long-term gilt yields, while ordinary variable rate mortgage rates are more closely correlated to short-term gilt yields. Short-term gilt yields have fallen by 400 basis points in the last 12 months while long-term yields have fallen by only 53 points.

Advisers need to reassure customers that these rate levels are appropriate in return for the security of a loan fixed for life which could be for over fifty years.

Of course it is not just the overall picture in relation to interest rates that is giving Ship providers reason to show continued confidence in the sector. There are other underlying factors that could, and perhaps should, see consumer interest in equity release solutions grow.

For example, it is highly probable that equity release will receive a boost in demand as customers increasingly realise that raising finance in this way is less dependent on the factors impacting on the wider economy.

Additionally, product development is another factor that will stimulate growth. We’ve seen a proliferation of drawdown products in recent years and the need is now for providers to build in even more flexibility and simplicity as well as providing specific solutions for some customer needs.

For instance, care in the home has grown dramatically and this is expected to continue. The challenge for providers will be to deliver products that facilitate regular small releases to fund this type of care – preferably without impacting on State benefits.

Finally, one of financial planning world’s Holy Grails will finally be found when a provider can successfully find a way of using homeowners equity to help mitigate IHT.

Currently the maths doesn’t add up. But if a provider can crack this particular problem it will open up to advisers vast tracts of retired Middle England customers with wealth tied up in their properties.

This would not only open up equity release to a new higher net worth customer segment but also introduce a new section of advisers in the wealth and tax planning arena to equity release.

Peter Welch is head of sales and distribution at Bridgewater Equity Release

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