House price inflation has created a generation of people who may have relatively modest incomes, but have an asset that could well have doubled, or even tripled in value. But the conventional ways of releasing that capital – selling up and moving – are often impractical. This has lead to equity release becoming an increasingly attractive option.
However, until recently, all equity release products were not created equally. Until April this year home reversions did not fall under the Financial Services Authority’s (FSA) regulatory regime. This lack of legislation has played a huge part in hampering the growth of these products as many advisers and networks have been unwilling to recommend a product that was unregulated, irrespective of its suitability.
The importance of a level playing field was recognised by providers and the various trade bodies that represent the industry. Much effort was put into campaigning for equal regulation and this was eventually rewarded on 6 April 2007 with the introduction of the home reversion regulation.
The inclusion of home reversion plans within the FSA remit means that they are now subject to the same regulatory framework as lifetime mortgages. This new ‘whole of market’ regime encompasses advising, arranging, entering into or providing, and administrating reversion and lifetime mortgage plans.
Under this new legislation, these plans are now covered by the MCOB rules and advisers now have an obligation to make specific reference to them.
Equity release has been given the chance of a new beginning. Indeed, now that this market offers the same protection as other financial services products, it can truly be viewed as a legitimate way in which to release equity from your home.
Consumer benefit
Although for most advisers the legislative change has simply meant a more structured approach to the sale of this product, it is the consumers who will really benefit. Now home owners entering into most types of equity release transaction will be able to make use of the Financial Ombudsman Service and the Financial Services Compensation Scheme should they need them.
Enhanced training and competence requirements have also accompanied the tougher compliance regime for equity release for advisers in the sector. In particular, those who have already attained a lifetime mortgage qualification must take a top-up exam, and a new equity release exam has been introduced. Under both Safe Home Income Plans (SHIP) and FSA guidelines, it will no longer be possible for brokers to rely upon ‘grandfathering’ if they plan to continue selling equity release products.
However, with one battle over, another begins and it is a concern that some arrangements which allow you to release equity from your home are not covered by appropriate legislation. For example, the sale of lifetime leases and some sale and rent schemes are excluded, which could again cause a problem to the sector’s reputation.
The main debate
But let’s get back to the main debate – lifetime mortgages versus home reversions. There are clear and distinct differences between these two product ranges that mean they are generally best suited to different types of customers.
Home reversion plans offer a level of certainty and simplicity which many older consumers find reassuring. With these plans, once the percentage of the property being sold and the amount of the lump sum is fixed, all the financial arrangements are fixed. In addition, this type of equity release is not a loan and no interest is calculated or payable.
Reversion schemes also provide the client with some peace of mind when it comes to leaving a legacy to their heirs. As they are only selling a part of their home, the remaining portion can be left as inheritance. The proportion sold also reduces the inheritance tax liability for the estate.
An alternative product is the lifetime mortgage, which are generally preferable for those wishing to retain full ownership of their home. No interest is paid; instead interest rolls up and the initial loan plus interest is repaid on death.
A factor that affects the relative attractiveness of these products is house price expectation. It is hard to predict the direction of the market so any decision should not be based solely on this factor.
The first six months
So what has happened in the first six months of home reversion regulation? Well, to be perfectly honest – not a huge amount. Advisers, providers and customers are becoming accustomed to the new regime and wider product choice. Under the FSA regulations an adviser has to consider and investigate both home reversion plans and lifetime mortgages when advising clients about equity release, and this is bound to bring the product to the fore in the near future.
We expect to see a much more equal distribution of product types. As advisers no longer have to explain to customers that while a reversion might be the best for their situation they will receive no formal protection, the market is sure to become more balanced. The popularity of these products should indeed grow as the property market stabilises and cools and people realise reversions could offer a better deal for certain consumers than lifetime mortgages.
The growth in popularity of these plans, as well as other equity release products is also likely to be fuelled by the activities of industry bodies such as SHIP and major product providers. The industry body and some companies have now introduced a new clause in the voluntary code of conduct that no member will accept any business from an adviser unless they hold a suitable qualification in equity release. This is intended to provide a firm stance by the industry to uphold standards in order to protect consumers.
To maintain standards of advice across both products, it is now also compulsory for IFAs working with any of SHIP’s members to hold a lifetime mortgage qualification. 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.
Equity release should no longer be looked at with disdain nor considered as a last resort. With the equity release sector now being in the mainstream, the stage has been reached where clients are perhaps not being treated fairly if advisers do not include equity release products in their retirement planning recommendations.
get the daily news delivered to your inbox
find the latest industry jobs
download our news ticker
