Commenting, he said: “This year, a combination of widely predicted house price falls and longer term interest rate rises should encourage many more homeowners and equity release advisers to turn to the oft forgotten Home Reversion Plan.
“The textbooks teach us that when house prices and interest rates move in opposing directions, a Home Reversion Plan can provide better value for money than a Lifetime Mortgage. This is because reversions don’t bear interest charges, and involving a full or partial sale of the property, lock in at today’s values so the homeowner doesn’t suffer from any house price falls on the part sold.
“Contradicting this theory, Key Retirement Solutions recently published figures showing that just 3% of sales were attributed to Home Reversions last year with 74% favoring a ‘drawdown’ Lifetime Mortgage.
“With a drawdown Lifetime Mortgage, each cash withdrawal is set at the interest rate prevailing at the time. Whilst the current range of rates hovering around the 7% level may seem fairly attractive, hence a loan doubling in size every 10 years or so, it would only take a 1 or 2% hike to make a Lifetime Mortgage an expensive choice in the long run.
“Most homeowners are usually keen to guarantee a legacy for the heirs, relying on their property to ensure this, yet with the exception of More2Life’s product, no Lifetime Mortgage provides this peace of mind. A partial Home Reversion plan does however, so it does appear strange that more aren’t arranged.
“A fourth issue which is most difficult to tactfully discuss with clients, is that of their longevity. Drawdown plans are often favored by the younger homeowner, but with 1 in 6 of us now expected to live to 100, many such plans could be in place for 40 years or more, with the original debt being 16x greater than first borrowed. Obviously each subsequent cash withdrawal will be kicking around for that much shorter time, but can only exacerbate the problem.
“There is no denying the flexibility of drawdown plans and that in taking only what is needed and when, the effect of compounded interest is lessened. Indeed I have arranged many myself for the right reason. That said, I do wonder how many other advisers are looking ahead and agreeing realistic expectations with their clients over the future value of their home and interest rates. I would remind them of the need to plan ahead for the long term when discussing with clients and to have an adult conversation around the risks of house prices, interest rates, legacies and ageing.”
