Avoiding the pitfalls

Dominic Fraser-Smith, Group Product Manager, Norwich Union Post Retirement Products

The equity release industry has come on in leaps and bounds over the past year. Following the further regulation of equity release in April, both Home Reversion and Lifetime Mortgage schemes are now fully regulated by the FSA. However, more action is needed to develop consumers’ trust and understanding of equity release.

The equity release industry has been plagued with the legacy of mistrust from the 80s, with customers and intermediaries alike shying away from buying or selling these products. But while there may have been scope for valid concerns in the past, the entire market is now regulated and many providers like ourselves are working with industry bodies to make products simpler and clearer.

Some of the changes that have been made include a voluntary code of conduct for SHIP (Safe Home Income Plans) members. They need to pledge that they will offer clear representation in literature, have an independent solicitor, have a ‘no negative equity’ clause and clear documentation outlining the costs. In addition, with the regulation by the FSA, advisers are tasked with ensuring that their advice process is thorough and considered. These moves have helped to make the equity release market far safer for consumers.

As a leading provider in this sector, we recognise the important role that intermediaries and mortgage brokers play and will continue to play in the safe development of this market.

Norwich Union has always strived to ensure that its equity release products are safe, competitive and meet the highest standards possible.. The decision by SHIP members to reject any business, direct or via intermediaries, unless advisers have passed the relevant examinations is a significant step in ensuring that customers can be confident that they will receive a high standard of advice.

This resolution means that all advisers will have to sit the lifetime mortgages examination. These are offered by the Chartered Institute of Insurers, The Chartered Institute of Bankers (through its educational wing the Institute of Financial Services) and the equivalent bodies in Scotland. This is intended to provide a firm stance by the industry to uphold standards within the industry in order to protect consumers.

Joint examinations with home reversion modules are also currently available and from autumn this year many providers will stop having separate exams and offer only the combined certificates. These examinations have already proved popular since their introduction in April; by June alone CII announced that more than 1200 mortgage advisers had enrolled in the home reversion plans examinations.
The further safeguards that have now been put in place for lifetime mortgages ensure consumers’ safety. These are vitally important to continue the building of trust between advisers and customers. Here at Norwich Union we pride ourselves on working with only qualified advisers. However, we are delighted to know that all SHIP members must now follow suit, and hope that this will allow customers access to the highest quality advice when taking out an equity release scheme.

Nigel Hare-Scott is

Although lifetime mortgages account for less than 1% of the total mortgage market, they attract as much attention in the trade press as buy-to-let, which is now forty times bigger. Why should this be?

The latest statistics from Safe Home Income Plans (‘SHIP’) for the second quarter of 2007, as usual, focus upon the good news for the industry – a 16% uplift in transaction numbers. This is mostly attributable to the rise in the share of drawdown mortgages, which are typically smaller in value. As a consequence, the overall growth in the value of loans advanced remains well behind forecasts. Whilst in first half 2007, the value of new lifetime mortgages was 18% higher than four years ago; it is unclear how much of new business represents churning by homeowners of their previous deals.

There is a general view within the industry and increasingly in wider circles (notably among economists), that in time the growing equity release sector will make a bigger impact in the mortgage market overall. In other words, the growth has simply been postponed. This probably explains why we are witnessing an increase in new entrants to the market and others interested in entering in the near future. All this would explain the vast sums of money being committed to its development.

To return to our comparison with buy-to-let, it should be noted that it grew by a factor of ten between 2000 and 2006. Even the most bullish predictions for equity release do not anticipate this level of expansion. However, the buy-to-let experience does set a precedent and clearly illustrates that growth can come quickly once a product range becomes mainstream.

For various reasons, lifetime mortgage providers are still positioning their products as the norm rather than the exception for homeowners seeking additional funds in later life. This is not helped by the continued media hammering that the market receives. As a consequence, many advisers still consider equity release as a last resort option or worse won’t consider it at all, thus leaving their clients potentially starved of an ideal solution to their financial needs. In practice, the issues holding back development are steadily being eroded, and no doubt they will be forgotten in five to ten years’ time. In this regard, the recent announcement from Barclays, albeit well overdue, of a scheme to assist their former shared appreciation mortgage clients is very welcome.

Although the value of lifetime mortgage completions has not met expectations in recent times, the number of equity release enquiries continues to grow. However, prudent people plan for their future. They do not rush into decisions and the lifetime mortgage product remains a relatively new concept for most homeowners. Indeed the name for the product is unfortunate. Halifax have renamed their lifetime product ‘retirement plan’, an indication of the change ahead, although this product is in fact an interest only mortgage.

Most equity release enquiries come from homeowners who don’t have an immediate need for cash. In many cases, they would be insulted to be considered vulnerable. These potential consumers are evaluating their retirement options from the age of 55 upwards, and the proportion of the population in this age group is growing. Equity release has a major part to play in improving retirement lifestyles and sustained growth for the lifetime mortgage market will come when these ‘Baby Boomers’, now beginning to enter retirement, drive a cultural change in attitudes towards this market. This is why the greatest asset of an equity release specialist is its customer base - converting enquiries can be a longer process than, say, a pension or investment sale.

Further development of the sector is likely to come from a more widespread availability of products, which cover second homes and letting. Thus, it is probable that buy-to-let mortgages will in due course be refinanced by lifetime mortgages. This is a logical progression with many younger people now purchasing buy-to-lets for pension planning purposes.

Daren Carter, managing director, in retriement services

Lifetime mortgages have come a long way since they were first launched in the late 1990’s. The launch of new features, such as increments and drawdown structures, has given consumers increased levels of flexibility. The development of lifetime mortgages has continued this year with the introduction of more new features, but whilst these developments are clearly beneficial to customers, they bring new challenges for advisers in terms of how to identify which product best suits their clients’ needs.

One of the problems with lifetime mortgages in the past was the uncertainty of the debt that would accrue, if the client were to live to a ripe old age. This issue would be exacerbated when a client did not withdraw the maximum amount, perhaps wanting to leave an inheritance. Were they then to live beyond life expectancy, a combination of low house price appreciation and the compounding impact of roll up interest could mean that there would be no equity left in the property for the estate.

To address this issue, In Retirement Services have developed a ‘protected equity guarantee’, which ring-fences the unused equity in the property. In common with traditional reversion plans this allows the client, at outset, to set aside a proportion of their property for inheritance. For example, assuming a 70 year old living in a £200k house could withdraw £60k, but they choose to withdrew £30k, only 50% of the available equity, the protected equity guarantees the remaining 50%, regardless of how long they live, assuming they make no further drawdowns.

The advent of drawdown products has broadened the appeal of lifetime mortgages and these products now make up over 40% of all lifetime sales. However, despite their obvious benefits, the caveats attached to future withdrawals on some contracts create uncertainty for brokers and clients. We, therefore, took the decision to launch a facility called ‘guaranteed increments’, which guarantees that the facility will be available in the future.
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Another area that I believe brokers need to consider from the perspective of treating customers fairly, is the current life expectancy illustrations. Currently, the FSA stipulates that providers must illustrate mortality based on average life expectancy, which, by definition, means, for 50% of customers, these illustrations will not be an accurate reflection of what they might repay.

This issue is compounded by how people use the illustrations. Firstly, most people underestimate their life expectancy, and secondly, when presented with a spectrum people normally use the highest figure as the worst case scenario. In reality, the ‘worst case’ is just an average. It is for this reason that we requested and received special dispensation from the FSA to provide an additional illustration using a projection to age 100. By doing this we are providing customers with a clear picture of the potential amount they may have to repay.
The innovations I have described continue to broaden the appeal of lifetime mortgages for customers, but they also make product comparison more difficult. Advisers now need to adopt a much broader analysis to decide on which product is right for their client.