This week heralds a landmark for the equity-release business. From April 6, all home-reversion plans will be regulated by the FSA in line with other mainstream products in the sector. The impact on one of the oldest means of releasing equity from the home will be considerable.
The first home-reversion plans were created in 1978, offering retired people the chance to unlock the capital tied up in their homes. The fundamental principle is that a homeowner can sell all or part of their home in return for a cash lump sum or series of payments and maintains the right to remain in their home until they die or they decide to move out.
In October 2004, when mortgage regulation came into force, lifetime mortgages – the other principal home equity-release product – also fell under the FSA’s regulatory regime. Since home-reversion plans are not technically mortgages – unlike a lifetime mortgage, where the homeowner takes out a mortgage loan secured on the property – they were excluded from FSA regulation.
This situation was short-lived, however, as the Treasury recognised that a part-regulated sector could lead to a confusing and unfair market and fail to extend consumer protection across the board. Regulation from April 6 is the result of their assessments.
What will the changes in regulation mean for consumers? The main difference is that there will be a level playing field between products in the equity-release sector.
In the current market, consumers could potentially feel nervous taking out an unregulated home reversion plan. Similarly, financial intermediaries and advisers can be put off recommending products such as these for fear of them being unsafe, even if they represent the most suitable choice in every other respect.
The share of home-reversion plans in the equity-release market has declined in the past few years, partly due to the lack of regulation. This is forecast to change dramatically with a more balanced regulatory framework.
With the added assurances that regulation will provide, the home-reversion share of the market will increase to around 20 per cent over the next few years – a threefold increase on its current share.
Further, equity release will become a mainstream retirement product and the market for home reversion could increase even more strongly over the next five to 10 years.
The changes will bring the option of home reversion to the fore as it is recommended by more and more intermediaries. The benefits will also become clearer.
With a home-reversion plan, it is clear from the outset how much the homeowner will get. There are no restrictions on the use of the cash and no hidden financial implications or costs such as interest.
It is a simple arrangement and can offer better loan to value equivalents than lifetime mortgages. Some elderly people are very debt-averse and home-reversion plans are more suitable to them than lifetime loans.
Home-reversion plans are also ideal against a background of low house price growth or higher interest rates, providing greater certainty in these climates.
What is more, given that final-salary pension schemes continue to close and investment in money-purchase schemes is well below the level needed in retirement – especially considering increased longevity – the future for this market is brighter still. With the benefits so apparent, why have home-reversion plans been given a bad press over the years?
The answer is that they have often been wrongly associated or mistaken with other problematic schemes such as shared appreciation mortgages and home income plans – although these have nothing at all to do with home reversion.
In an effort to restore consumer confidence, Safe Home Income Plans was formed and a voluntary code of conduct was introduced that, among other things, provides a no negative equity guarantee which is aimed at providing protection for homeowners participating in the equity-release market.
Self-regulation has so far worked well for the home reversion market, so much so that the independent Ship reversions complaints board has not had any complaints since its inception in 2004.
Nevertheless, homereversion providers felt strongly that customers would benefit most from equity release if all the main products were sold within the same regulatory framework.
We consequently sought FSA regulation, even though home reversion business suffered as a result as some misinterpreted the call as an implication that the products were in some way unsafe. But we knew this was a necessary evil that the industry needed to tolerate in the short term to ensure that regulation was secured.
All the other major home-reversion providers welcome the introduction of regulation on April 6 and believe the benefits will be felt by the entire equity-release market.
Uneven regulation has contributed to putting the brakes on growth for the market as a whole. Now the stage is set for home reversion plans to become an established product of choice for the retired homeowner and for massive growth in the coming years.