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Opening up the home reversion market

Key Retirement Solutions business development director Dean Mirfin says advisers have a duty to consider home reversions as well as lifetime mortgages for equity-release clients


Amount raised Depreciation 1% Equity Constant Equity Appreciation 1% EquityLifetime mortgage60,000 0 250,000 26,346 82,386204,485 305,040Home reversion60,283 81,793 100,000 122,013Home-reversion plans were available long before the invention of the lifetime mortgage and there is evidence that home reversions are standing the test of time.

Our latest monitor shows that if the trend for this year so far continues then home-reversion business levels for 2005 will be higher than in 2004 which will be the first increase for some years and may well be the start of a revival.

The Times recently reported over the concerns that home reversions are still not regulated. Regulation is expected to be in place by 2007 but it is worth advisers tasking a look at the Safe Home Income Plans code and, in particular, the processes which must be followed when advising on Ship-registered reversion plans. Customers have recourse for complaints and Ship can enforce up to 25,000 in compensation or the same figure as a fine.

It is worth pointing out that home reversions in their history of over 25 years have survived through the problematic mortgage schemes available in the late 1980s and early 1990s. Despite this, there is the need for regulation, not just so that these plans are sold and advised upon appropriately but more to ensure they are considered by advisers at all.

MCOB 8.5.4 R states that: 1: A regulated lifetime mortgage contract will be suitable if, having regard to the facts disclosed by the customer and other relevant facts about the customer of which the firm is or should reasonably be aware, the firm has reasonable grounds to conclude that…alternative methods of raising the required funds such as, in particular: a home-reversion scheme; or (where relevant) a local authority (or other) grant; are less suitable.

The misconception is that if I advise on lifetime mortgages only, then I need not consider home reversions if I do not want to. But the rules are pretty clear about this fact.

The rules, however, do not require this to be taken to the stage of recommending a particular provider but to have evidence that this was discussed as a potential alternative. Documentary evidence is the only way to prove this when a recommendation to proceed with a lifetime mortgage is made on the basis of it being the most suitable.

What are the issues and considerations in deciding suitability of home reversion against a lifetime mortgage?

The clearest point of debate is that, with a home reversion, unlike with a lifetime mortgage, ownership of the home is being given up.

A common misconception in understanding this process is that if you arrange a partial reversion with the majority of providers then the client is still selling 100 per cent of their home. For example, a client arranges a 50 per cent reversion, they sell 100 per cent of their home but their lease agreement with the investor confirms their legal interest in the remaining 50 per cent.

In principle, there is no difference from the point of view of client protection but something that, if discovered by the client with their solicitor at the legal stage, may cause some confusion and concern.

Assuming that the psychology of selling a home can be reasoned with, there are clear advantages of a home reversion.

The first is they inherently guarantee an inheritance within the scheme. Whether the property value in the future falls or rises, if I have used 50 per cent of my home I have retained 50 per cent for potential inheritance.

The greatest advance in the field of lifetime mortgages has been the development of the drawdown product.

Home reversions, through offering guaranteed further advances, can now mirror in many respects this facility, potentially offering this same level of suitability.

If death occurs in the early years, surely the home reversion will be considerably more expensive? This is not as much the case now that plans are available which go some way to alleviating this fear.

The greater misconception can be in what the future may hold when considering a lifetime mortgage alongside home reversion. The great unknown is ultimately, what will be left in the property value in the future?

The table at the top of this page uses MCOB illustration rates of increases or decreases in property value of 1 per cent to show the effect over 20 years of borrowing under a lifetime mortgage against a home reversion and the outcome if the property price remained constant.

The figures are based on a property value at the outset of 250,000, a client aged 70, reversion percentage of 60 per cent and a lifetime mortgage fixed rate of 6.8 per cent. The outcome may prove a surprise.

There is plenty of food for thought here, which may be why the popularity of these schemes may be set to increase.

It is not my intention to suggest that the issues raised are in themselves reasons to recommend home reversion in isolation but to highlight the fact that when considering suitability for clients are we seeing home reversion in the appropriate light and comparing the products in a like for like way to allow a considered and rational approach to suitability.

This year has seen considerable enhancements to the reversion products on offer, which is why now is the time to make sure that product suitability is based on up-to-date comparisons.


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