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The fees factor

The charges gap between lifetime mortgages and ordinary loans is widening and borrowers don’t feel they are getting a good deal Annie Shaw reports

Andrea Rozario
Andrea Rozario

Only a year or two ago, it looked like equity release could provide the answer for the many “assetrich, cash-poor” retirees whose pension provision did not stretch far enough.

The equity-release industry has been keen to keep on promoting this angle although putting the family home in hock in order to spend the cash released never seems to get past being a “last resort” option for most people. But could a new approach herald a revival in the market?

The industry suffered a number of reputational setbacks in its early days and although this has receded, no sooner had the scandals associated with shared app-reciation mortgages and negative equity started to fade than the credit crunch struck, causing a raft of major providers to pull out of the market.

Among those to quit or suspend equity-release lending were Northern Rock, Coventry, Saffron and National Counties building societies and specialist lenders Retirement Plus and Stonehaven.

The biggest blow came at the start of this year when the mighty Prudential, which a year earlier had 23 per cent of the market, stopped taking on new lifetime mortgage business, leaving just Aviva, LV= and Just Retirement as the only big names still in the market.

It seems that the only good news of late has been the reappearance in the market of More2Life, the specialist lending arm of Key Retirement Solutions.

With so many providers pulling out, however, it is little wonder that the latest figures from Ship, the equity release providers’ trade body, show that the value of the market slipped again in the second quarter of 2010 by 8 per cent to £196.7m. This is compared with the high of £325m in the third quarter of 2007.

But despite the turbulence in the property market over the past year or two, the so-called baby-boomers, who have benefited from record house price inflation, still apparently believe that their home can be their pension.

Just last week, LV= published research showing that about 1.2 million, or 23 per cent, of working over-50s may cash in their property to help fund retirement. A further 9 per cent will also be taking advice on using their property equity even before they retire.

LV= head of equity release Vanessa Owen says continuing doom and gloom over volatility in the housing market and seeing some properties fall in value has not deterred many people from using property to fund retirement and that “many are still positive that the equity they have built up over the years in their home is their best chance of having a more comfortable retirement”.

So, just what is stopping the market taking off? One obvious answer for the consumer is cost. The gap between the rate charged for lifetime mortgages and that for ordinary loans is getting wider.

In 2008, interest rates were an average of 0.31 per cent higher than regular home purchase mortgages but equity release borrowing is now around 1.45 per cent higher.

Rozario: ’Safeguards provide a wealth of reassurance that customers want when they choose to access the equity in their homes’

David Black, banking specialist at financial research company Defaqto, says: “The ’no negative equity guarantee’ is responsible for an addit-ional cost to equity-release providers of around 0.7 per cent a year.”

Ship director general Andrea Rozario says: “Measures on lifetime mortgages, such as the no negative equity guarantee, security of tenure and no monthly repayments, Rozario: ’Safeguards provide a wealth of reassurance that customers want when they choose to access the equity in their homes’

affect the pricing structure of the products, naturally leading to a slightly higher rate. However, these safeguards provide a wealth of reassurance that customers want when they choose to access the equity in their homes.”

But despite the guarantees, borrowers do not seem to believe they are getting a good deal.

Research for Age UK earlier this year, undertaken by the University of Birmingham, found that fewer than half of those surveyed were “very satisfied” with the value for money offered by their equity release plan, even though 75 per cent said the plan was “right for their needs”.

At the same time, mort-gages for older borrowers with indeterminate longevity look like a poor business proposition for lenders compared with other lines.

A spokesman for Saffron Building Society, which stopped lending this time last year, says: “Right now we are very busy in the standard mortgage market. Therefore, we have no capacity to re-enter the equity-release market at the moment.”

Recent research for Saga Personal Finance found that 15 per cent of people aged 50 years and over were struggling to find adequate finance for essential jobs such as making repairs to their homes. Despite a slight increase in numbers looking at equity release, Saga says most people will try and use savings or their income to fund such repairs and the high up front costs of equity-release plans are putting people off.

Group executive chairman Andrew Goodsell says: “For many, equity release is the ideal solution to this. However, until now, the market has not listened to people’s needs and providers insist on charging hefty fees upfront, which prevent many people from being able to access their money.”

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