Jason Whitcombe, director, Evolve Financial PlanningJonathan Fry, director, Jonathan Fry & CoDerrick Winspear, IFA, Pi Financial Dixon SutcliffeLife expectancy is increasing but levels of pension saving are falling, so how big do you think the market for equity release will be?
Whitcombe: There is an enormous market for equity release and home reversion. For the vast majority of people approaching retirement, their main residence is their most valuable asset.
Downsizing is certainly a viable way to release funds in retirement but, as the saying goes, an Englishman’s home is his castle and I believe that psychologically, most people would prefer to release capital from the home if this was seen as a safe option. Very few people have any qualms about taking out a mortgage in their younger years but equity release in retirement is not yet mainstream.
The challenge for those working in this market is to redress this balance.
Fry: The equity-release market is likely to continue to grow, given the contributory factors of increased life expectancy, falling annuity rates, low savings interest rates and lower levels of pension saving but exactly by how much it will grow is difficult to assess.
Research carried out by the Council of Mortgage Lenders in 2005 showed a 25-fold increase in the size of the market between 1995 and 2005 and the scope for further growth is massive. However, there are factors, such as interest rates and house price rises, which could have an impact upon future growth.
Winspear: I think it will more than double over the next few years. There are growing numbers of people who are investing in buy-to-let properties who will look at either selling these to fund their retirement or will look at equity release.
In addition, there are all the baby boomers who have been through the property price rises and have seen the benefits that property ownership can bring and who will look to cash in some of their equity to provide an income in their twilight years. The benefits of avoiding the inheritance tax threshold will also appeal to many.
How dependent is the market for equity release on increasing house prices? If house prices stabilise or fall, will the demand for equity release drop?
Whitcombe: I do not think the demand for equity release will fall if house prices stabilise. What has happened is that house prices have increased substantially while the value of pension income has been falling due to a combination of closing final-salary schemes, falling annuity rates and increased longevity.
This has made the main residence a much more important part of people’s overall wealth than it perhaps was 10 or 20 years ago. However, equity release is ultimately driven by a need for income in retirement and it is this that will drive future demand.
Fry: If house prices were to stabilise or fall, then the market would be affected but demand would still remain due to the factors mentioned earlier, which are unlikely to change in the near future.
There is also perhaps a greater acceptance by today’s elderly that there is less of a need to pass on the house as an inheritance and that the capital they have worked to acquire, including property, should be used to support them in retirement.
Perhaps the greatest threat to this market is a fresh misselling scandal.
Winspear: I believe demand will still be there because equity release is a long-term issue and because most products now offer a Ship guarantee. There is an element of security built in that means the debt will not be more than 50 per cent of the equity.
Taking into account the fact that debt is a growing problem, there will be a great number of people who will feel that equity release is the only way for them to continue living where they want to live with a reasonable quality of life.
Why do so few IFAs advise on equity-release/lifetime mortgages?
Whitcombe: This is probably down to a combination of factors. Unless you specialise in this market, it is not every day that you come across a client wanting to release capital from their property so it is quite difficult to keep up to speed with the products and services on offer.
Many IFAs will regard equity release as a risky business area from a compliance point of view, in the same vein as, for example, finalsalary pension transfers, and may choose not to actively look for clients wanting this type of advice.
If market conditions change, I could quite easily see this being the next so-called misselling scandal, with people claiming that they did not understand the risks involved.
Fry: Few IFAs advise in this area and this may have something to do with concerns about the relatively lax regulation which could leave the industry open to future misselling claims, making IFAs wary of entering this market.
The reputation of equity release needs to be improved. There are concerns about the relatively complex nature of products, given the target market, and some IFAs still remember the problems of the old-style home-income plans.
Many IFAs will see equity release as very much a last-resort option, with encouragement given to exploring other solutions first.
Winspear: I think this is down to fear and a lack of understanding of the benefits of equity release. In the past, when there were no built-in guarantees, many people had their fingers burned. Combined with the fact that equity release may not be the best option financially – as many people could sell and downsize – and that people can become attached to their homes, you can see why members of the public and some financial advisers are still wary of this type of product.
Will the introduction of regulation for the homereversion market improve the reputation of the sector as a whole?
Whitcombe: This is a really positive step. One of the reasons why a lot of advisers do not get too involved in this market is because it has a certain reputation. Regulation of home reversion will do a lot to improve standards across the board.
It should also give consumers peace of mind in what could be one of the biggest financial decisions of their lives. The combination of these two factors should improve the quality of advice and help the equityrelease/home-reversion market reach its full potential.
Fry: Regulation of homereversion plans will improve the reputation of equity release. However, there is concern that misselling claims could be brought against products in force before regulation, which would damage this market.
Winspear: I do not think it will help a great deal, although regulation may affect the number and quality of firms in the market, and once there is a level regulatory playing field, a number of big providers may enter the arena, which may lead to better value and more flexibility.