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Like it or lump sum it

Research from GE Life on equity release appears to show an alarming lack of knowledge of the product among IFAs. It predicts that the market will triple over the next five years and could reach 125bn by 2009. But it cautions that intermediaries must be careful to avoid another misselling scandal.

This is probably shutting the stable door after the horse has bolted. An FSA mystery shopping exercise in May revealed that an alarming 70 per cent of elderly homeowners had potentially been missold an equity-release sch- eme – not so much because they did not need it but because they had been persuaded into a lump-sum plan when what they needed was the income-drawdown version.

Salespeople have been quick to defend their actions, saying they sell the lump-sum version because that is what people ask for. The reality is that most homeowners probably do not know that the income-drawdown version exists.

Northern Rock, one of the few lenders to offer a regular-income option, sells 91 per cent lump-sum schemes to only 9 per cent income schemes. But is this because Northern Rock and the intermediaries make more money out of the lump-sum schemes than out of the income schemes – or is this really what people want?

It would appear from GE Life’s research that plenty of intermediaries are equally ignorant of the flexibility of the product. While 56 per cent had advised on equity release in the past six months, 19 per cent refuse to advise on the product, claiming it is too high risk. Whether they mean it is too high risk for the homeowner or that the adviser is afraid of being accused of misselling, the research does not reveal.

What most people want is a product that gives them the option of a lump sum at the beginning of the contract, probably as small as 5,000 for those people who simply want to get the roof fixed, buy a new car or take a holiday, with the option to take further advances on an annual or irregular basis to supplement income. By keeping borrowing to a minimum, this reduces interest charges.

Norwich Union admits that the fear of interest charges eating into the homeowner’s equity is probably the biggest single reason why relatively few equity-release schemes are sold. Head of marketing for equity-release products Nigel Spencer reckons that for every 10 enquiries NU gets, only one homeowner signs up. Clearly, the products in the marketplace are not what customers want.

The reality is that over two-thirds of equity-release schemes are signed up by about five big specialist intermediaries, including Key Retirement Solutions. Dean Mirfin of KRS admits that no one offers the ideal product but “the situation has improved dramatically over the past five years and we are getting there gradually”.

The problem is, as Mirfin puts it: “Without having a high initial lump sum or a commitment to draw down a fixed amount each year, as with the Northern Rock scheme, there is no money for the lenders in a totally flexible equity-release scheme.”

Pru comes into the mar- ket next month with a product which has a relatively high initial loan of 20,000 and further advances for an indefinite period. But further advances have to be at least 5,000, which could mean that the homeowner soon comes up against the maximum loan to value of 35,000.

The Pru’s Anthony Frost says: “We believe that this is what people want.” But this is a pretty high further advance and is not suitable for many elderly people who just want an extra 40 or 50 a week to help with the household bills.

The trouble with Northern Rock’s scheme, which offers income in the form of annual loans paid monthly, is that you cannot vary the amount of income you take, nor can you discontinue it without repaying the loan in full.

You cannot blame intermediaries for not wanting to sell a product which is right for only a few homeowners and which could expose them to misselling charges. Lenders must put on their thinking caps and produce a product in which consumers and intermediaries have confidence.

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