We hear much comment and analysis about the problems faced by aspiring first-time buyers, and rightly so. But the issues and concerns for those who are already home owners needing secure financial plans for retirement attract not quite so many column inches.
Most people are thoroughly familiar with using the equity in their properties as the primary means by which they finance their lifestyles. Home owners use the growing equity in their homes to pay for cars, holidays, school fees and other expenses that are not directly related to the property itself – remortgaging, second charge borrowing and debt consolidation can all enable consumers to borrow easily and more cheaply than using a credit card or unsecured loan.
More than just a roof
In effect, we recognise that property is more than just a roof over our heads – it is probably our most valuable asset. The growth in buy-to-let among small-scale investors as a means of providing for retirement shows how many people have lost confidence in traditional pension schemes and are turning to bricks and mortar.
It is tangible, people understand it, and it has also proved a spectacularly good investment over the years. The combination of a growing population along with an acute shortage of homes on this overcrowded island means that this is likely to remain so over the medium term.
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With this high level of confidence in bricks and mortar among the general public, it is perhaps surprising that there remains a reluctance, both among advisers and in the media, to advocate using the equity in our homes as an integral part of retirement planning.
When people sit down with their advisers to draw up their balance sheet of assets and liabilities, and project their future income and expenditure, they should regard the equity in their homes as an asset that is available for use, in the same way as cash, bonds or stocks and shares. Equity release is not a choice of last resort when all other options have been exhausted. It is a rational option for many people either approaching or in retirement.
More choice than ever
What is clear is that there has never been more choice for the older home owner who wishes to use equity release. Apart from the obvious first option of downsizing, there is now a diverse range of products offered by an ever-increasing number of providers, covering lifetime mortgages and home reversion plans.
Over recent years, the home reversion has proved less popular than the lifetime mortgage, with the latter outnumbering the former by more than 10 to one. A reason for this has been the reluctance of intermediaries to recommend home reversions – an unregulated product – rather than lifetime mortgages, which have been regulated since ‘Mortgage Day’.
All this changed on 6 April when home reversions were brought under the Financial Services Authority’s regulatory framework – following considerable lobbying by the industry under the umbrella of our trade body, Safe Home Income Plans. At last, this established a truly level playing field.
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One of the main advantages for some consumers is that home reversions offer greater certainty as there is no interest roll-up, and the home owner knows exactly the share in the property that they have sold and retained. On top of that, more cash can typically be raised as the rates offered exceed the maximum loan-to-value equivalents of lifetime mortgages. Several reversion providers will enhance the amounts payable in cases of impaired health, and a more flexible approach is often taken towards properties that might not be acceptable as security for a mortgage.
Advisers are now obliged to make specific reference to home reversions in their Initial Disclosure Document and the designated Key Facts Illustration format is similar to that for lifetime mortgages. Home owners entering into both types of equity release transaction can now make use of the Financial Ombudsman Service and if appropriate, the Financial Services Compensation Scheme.
The comprehensive regulatory environment places an additional obligation upon advisers to ensure that consumers enter into an equity release product on a fully informed basis. To give additional reassurance for the sector, advisers need to meet the tougher compliance regime with enhanced training and competence requirements
Considering equity release
There are various ways in which equity release can be considered as a means of improving retirement planning, in addition to mitigating inheritance tax liability. For example, pension income can be bolstered by deferring annuity purchase or pension drawdown. Alternatively, cash releases can be used to boost pension contributions upon which tax relief is available at the home owner’s marginal tax rate. Moreover, tax-free cash can later be withdrawn from the pension pot. Of course, all this requires careful and objective financial analysis and it incumbent on advisers to undertake this role for their clients.
The enhanced regulatory umbrella has given equity release the chance of a new beginning. Indeed equity release can now be treated as a market sector in its own right, and not just a small segment of the market with a patchy past reputation. Financial advisers have a key role to play in extending the use of equity release with home owners increasingly expecting to use their home as a retirement planning tool.
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