Robert Owen is chief executive officer at the London Mortgage Company
Of the two most popular equity release schemes, lifetime mortgage and home reversion, lifetime is most popular. The differences between the two are that lifetime involves taking out a loan on which no interest or capital is paid until the house is sold. The interest is compounded and means the total rate of the loan is greatly increased. A home reversion plan on the other hand involves selling all, or a percentage share of the property, while the owner continues to live in it. The reversion company then takes a slice of the sale price when the property is sold.
New lifetime mortgages reached £1.032bn. In 2005, new lenders entering the lifetime sector included Prudential and Bristol & West. The success of Safe Home income Plans (SHIP) was a key driver for new entrants. It is an industry body whose members offer a ‘no negative equity’ guarantee. This is an important factor when it comes to recommending a lifetime mortgage since the loan is secured against the value of the property and house prices don’t always go up. The property could well be worth a lot more than the final debt, but it could also be worth less. This is something that brokers advising on, or considering on advising on this type of equity release should bear in mind. It is still less than two years since the Financial Services Authority (FSA) first regulated lifetime mortgages, and with this product, possibly more than any other, it is vital to know your customer, and the options available to them.
Lack of expertise
The FSA’s recent mystery shopping exercise into the sector highlighted a lack of broker expertise. Brokers need to be aware of the complexities of equity release, not least to protect themselves and avoid any accusations of mis-selling at any time in the future. As a general guide, begin by ensuring that any products recommended are SHIP-approved.
Always be aware that, in many cases, you will be dealing with people that are elderly and anxious of the whole process. For many, it will be their first time dealing with a financial adviser so try and use plain English. Ensure that the clients involve all the beneficiaries of their estates from the beginning. Children and any other beneficiaries need to be fully aware of what is happening from the outset to avoid any misunderstanding in the future. Crucially, inform the client of the likely impact on future welfare benefits on entering into such a scheme.
Make sure that the client instructs an independent solicitor experienced in equity release cases. The lender will require the solicitor to sign a SHIP certificate (confirming compliance with SHIP’s Code of Practice, etc), before any funds are released. The client should then seek advice from the solicitor on whether or not to make a will.
Not for the faint hearted
It should now becoming apparent that anyone advising on these products almost needs to be a health professional; a welfare benefits specialist as well as a good communicator and financial expert.
This is not a market for the faint hearted. Anyone thinking of offering advice in this sector needs to decide if they can afford the time and resources to do a proper, professional job for their clients. Any broker who is not transacting business on the basis of at least two or three cases per month is putting themselves and their clients at risk and should consider making a referral arrangement. Even those who are transacting appropriate levels must satisfy themselves they are safe and that they have appropriate systems and controls in place to operate safely and compliantly.
A good place to start is the SHIP equity release checklist. This sets out, in a straightforward manner, the key areas an adviser should cover when selling equity release products to clients. The checklist can be downloaded from the SHIP website at www.ship-ltd.org. SHIP has announced that, from August 2007, its members will no longer accept business from advisers that do not hold an appropriate lifetime mortgages qualification. This is a radical move that has been widely welcomed within the industry that aims to end so-called ‘dabbling’ in equity release.
An important and exciting market
For those brokers committed to the sector, they are now in an important and growing market that sees exciting new products being introduced on a regular basis. Only a couple of years ago three lenders – Norwich Union, Northern Rock and Mortgage Express – accounted for about 80 per cent of the lifetime mortgage new business. With names such as HSBC, Royal Bank of Scotland (RBS), and NatWest entering the market, that dominance is being challenged and the sector is set to develop and strengthen further.
Increasing competition in other mortgage sectors will also force providers to look to the equity release sector to bolster their income streams. Product providers are also adding more bells and whistles to existing schemes in order to keep abreast of market trends and to differentiate them from the rest of the pack. A welcome recent development is the rapid growth in popularity of lifetime drawdown mortgages that now account for a big slice of the market.
However, concerns over the treatment of lifetime mortgages with regards to Basel II has made some product providers nervous. It centres on the ‘no negative equity ‘ guarantee and the revised Basel framework, which will apply from 1 January 2008, could change the lifetime mortgage market, forcing either increased rates, or the removal of the guarantee. The FSA is currently considering the appropriate treatment of lifetime mortgages under the Capital Requirements Directive, which is closely linked to the revised Basel framework and is in discussions with the Council of Mortgage Lenders (CML) and other bodies about it.
Peace of mind
What is eventually decided could make or break the lifetime market because without the guarantee, the scheme is dead. Since, with a lifetime mortgage, the value of the product is decided on what the market is like when your client dies, it is possible it may be worth less than the final debt. This is why the negative equity guarantee is so important. High-street players in the sector have tended to stick to providing lifetime mortgages. Other provides, like Retirement Plus, have taken steps to reduce the uncertainty by developing products that are less dependent on how long the client lives. Through its Property Plan, it buys a share of the property at full market value and the share increases at a fixed percentage each month. The client has peace of mind knowing they have sold at market value and, provided they don’t take out the maximum amount, will always have an inheritance to leave no matter how long they live.
The FSA has now decided to expand the existing lifetime mortgage exam into a single equity release exam. Brokers need to be aware that in all advised equity release sales, advisers will be required to consider alternative equity release options, so lifetime mortgage sales processes must allow consideration of whether a client would be better off with a home reversion plan and vice versa. Advisers will require knowledge of how each product works and the FSA’s proposals for the regulation of home reversions include high level standards for Training and Competence (T&C). Those advising must be competent and able to provide clear, concise and consistent information and good quality advice.
Distribution
When it comes to distribution, there is speculation over whether we will see increased selling by direct sales forces. The broker market is highly concentrated, with Key Retirement Solutions commanding around 80 per cent enabling it to negotiate the best proc fees. Brokers are in the business of looking after their clients over the long-term. Increasingly that means freeing up cash from their property as they move into their latter years. Brokers must therefore be prepared to put in the work by obtaining the right qualifications and keeping abreast of changes in pensions and welfare policy, or alternatively, use a referral service.
The equity release market is forecast by Datamonitor to grow to £3.6bn by 2009/10, and recent research shows that up to 18 million home owners (47 per cent) intend to tap into some form of equity release as part of their retirement plans. Equity release will be increasingly used as a planned approach to retirement rather than providing for luxuries or as a last port of call for funds. Brokers have a big part to play in bringing the schemes to market.
