As the present climate of the mortgage market and continuing media hype surrounding the credit crunch impacts on consumer confidence, Safe Homes Income Plans (SHIP) - the trade body representing 20 equity release providers and over 90 per cent of the sector by volume- considers why SHIP’s product guarantees are now more valuable than ever for the consumer.
ince the mid 1990s, the UK has enjoyed a period of stability in both the general economy and housing market. Following recovery from the recession in 1993, inflation over the last 10 years has remained relatively stable and interest rates, until this last year, have been comparatively low. Average UK house prices have, in contrast, increased substantially, growing from £70,000 in 1997 to £199,000 in 2007.
In times of relative stability product guarantees and security can appear to be relatively low in order of importance. However, when the market climate changes and future direction is unknown, guarantees come into their own and the safety and peace of mind they are designed to offer become a necessary additional consideration for consumers.
Offering safeguards
Over the past weeks, direction of house prices has increasingly been questioned as the impact of the credit crunch becomes more evident. Many mainstream lenders have retracted product offerings and the future of mortgage repayments and value of property equity are in the balance for thousands of home owners.
However, such worries are somewhat reduced in the equity release market.
Unlike mainstream mortgage loans, equity release loans have rates priced on the basis of 15 to 20-year projections. With this longer term view, immediate changes in the housing market, plus economic expectations, become less critical and thus lending decisions are based on different risks.
Evidence from the past 10 years demonstrates the effect of time upon market conditions. The probability that short-term downturns will correct themselves increases considerably when projections are based on a 15 to 20-year outlook compared to just two or three years, and short-term volatility and liquidity issues have minimal impact.
Additional protection
However, aside from the nature of these loans there are also a number of safeguards operating in the market and offered by SHIP to help ensure the market conditions do not create a cause for concern.
With the potential of falling house prices during 2008, the most relevant and important product promises that the sector offers at this present time is the ‘no negative equity guarantee’. This promises the consumer that the interest rate charged on their lifetime mortgage or drawdown mortgage scheme will remain fixed for the length of the loan and the client will never owe more than the value of their home.
The average rate of lifetime mortgage products is currently considerably lower than the average standard variable rate of mainstream mortgages. However, a guarantee that this rate will never increase for the length of the loan and will under no circumstances exceed the price of the customer’s property, adds the necessary reassurance that costs will never reach a level that creates potential financial hardship for dependents or beneficiaries of the will.
Further product promises that the trade body ensures include the guarantee that clients can move home; allowing customers to transfer their loan directly to another property without incurring any financial penalty. This offers an added flexibility for customers who, after taking the decision to release equity from their family home, may be forced to move due to reasons unforeseen at the time of applying for the scheme.
Code of conduct
A stringent code of conduct set up by the trade body also insists that customers seek independent legal advice before embarking on equity release. Up to date on all current issues, independent legal advice ensures clients are fully briefed away from the gaze of a product provider, on all areas they need to consider before taking the final decision to release equity from their home.
The customer will also receive a certificate from their independent lawyers to verify receipt of this advice. This added safety measure offers the additional peace of mind that the decision made is fully informed and complies with the customer’s wishes.
Tenure for life
SHIP’s final product promise is the right to tenure for life. In light of recent criticism of sale and rent-back schemes, which are not equity release and are unregulated, this promise holds a large degree of gravitas and peace of mind for the client. This guarantee assures customers that, regardless of personal circumstances, ever increasing Base Rate or a potential property crash, their right to live in their own home will never be compromised.
These product guarantees form the strict code of conduct that has governed SHIP members since the trade body’s creation in the early 1990s. As life expectancy increases, growing numbers of people will turn to equity release as a viable option for retirement income.
It is therefore the role of the trade body in the equity release market to ensure that these consumers continue to remain sheltered during market upturns and market downturns and with such stringent guarantees we believe that, even in present stormy waters, equity release customers will continue to remain protected.
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