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Reversion comes to the fore

It is perhaps unwise to look back to last year to deliver any thoughts on the current state of the mortgage market but there is one sector that has been fundamentally changed by events which took place a little over a year ago that are not related to the credit crunch.

Last April, there was a levelling of the regulatory playing field for equityrelease products when homereversion plans were brought under the auspices of the FSA. This landmark event came two and a half years after the other equity-release sector, lifetime mortgages, became regulated.

The decision to regulate home-reversion plans was made following a concerted campaign by many homereversion providers, advisers and trade bodies who felt that its position outside regulation created something of a skewed equity-release marketplace.

It was felt that its unregulated nature was a determining factor for advisers and consumers in considering the product and that the whole sector would benefit from the added safeguards that regulation would so clearly bring.

Those who had championed regulation for homereversion plans got their wish on April 6, 2007 and the market for both types of equity-release products is now on a much more even foundation.

However, we should not forget that regulation did not ensure that all things are equal in the equity-release market. There is still a fundamental difference in their treatment for VAT, with home reversions defined by HM Revenue and Customs as a property-related transaction whereas a lifetime mortgage is deemed to be a financial product.

This means that commission payments due from home reversion plans may well be liable to VAT if the principal firm is VATregistered, unlike lifetime mortgages which are exempt.

As this could be an important consideration if the firm is a network or a bigger advisory operation, lobbying efforts are being made, not least by Ship and the Association of Mortgage Intermediaries/Aifa, to move this particular goalpost for home reversions in line with those that currently exist for lifetime mortgages.

Regulation is almost universally considered to be a positive for home-reversion providers and advisers. No one could argue against the benefits of an advisory community needing professional qualifications to advise and sell the product or the fact that levelling the regulatory playing field means that both options are objectively offered to the clients.

Consumer confidence, particularly in the equity-release market, is vital and regulation certainly provides much needed stability and peace of mind for those considering their options.

The move to regulation may have had an impact on home-reversion plan sales but the positives outweigh the negatives.

If we look at the overall figures for 2007, the number of new home-reversion products sold rose by 6 per cent from 1,440 in 2006 to 1,529 last year.

This means that home reversions now represent 8 per cent of total equityrelease sales – a significant increase when we consider the figure was just 3.5 per cent in 2005.

At the end of the first quarter this year, the overall number of current plans stands at 10,581. However, we can not look at the state of any sector without focusing on the impact that the credit crunch has had.

The equity-release sector has not been left untouched but the fundamentals of the market are sound and it is in a strong position to weather the storm.

Recent figures from Ship reveal that, in the first quarter of 2008, overall numbers of equity-release plans fell from 6,785 to 5,892. With the longer completion times for equity-release products, the fall reflects the lower demand that the market saw in the final quarter of 2007.

But providers are already saying that demand picked up throughout the first quarter of this year and we should expect this to be fed through into the numbers in the next quarterly analysis.

The current climate may well see the continued growth in home-reversion take-up for a number of reasons, not least the fall in property prices that the market is witnessing for the first time in over a decade.

As an equity-release option, home reversions are the only plans that offer the security of knowing exactly what is left in the pot with regard to released cash from the property.

Lifetime mortgages mean the roll-up of the interest on the loan erodes the eventual property equity value but home reversions offer the reassurance of knowing that a fixed percentage of the property value is still left to sell in the longer term.

In addition, home-reversion customers get their equity release based on the worth of their property today, so, given that most commentators expect house prices to continue to fall back over the coming months, selling a proportion of the property to a home-reversion provider means that some of the risk of falling house values is transferred to the provider.

Those in the equity-release market are also aware that the main underlying demand factors for the products that currently exist are only likely to be strengthened in the future.

The critical drivers, including the demographic bulge, the pension deficit, increasing longevity, pressure on continued welfare support, the rising cost of living, are all hitting home. Coupled with a gradual change in attitude to equity-release products and the removal of the stigma that may have been attached, we can view a positive future.

There is still much to do in terms of education and information and, in a sense, the sector is fighting against its former reputation.

The advisory market is vital in delivering the message about today’s equity-release products and ensuring that customers have the right solutions for their needs and circumstances.

It is important that the number of advisers in the sector continues to grow and that clients have a source of education and advice they can trust. If the sector can expand its reach to a wider audience then the barriers, which are already being wiped away, will fall completely.

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