Now is the time for advisers to review their attitudes to equity release as consumer demand is growing, regulation is giving greater protection, processes are ever-improving, providers are launching more flexible products and the risk to reward trade off is becoming more attractive.
The equity release market today, at around £1.3 billion per annum, is small and relatively few intermediaries are involved.
Demand for equity release products is, however, potentially very large. Many homeowners are facing the prospect of retiring with insufficient pension. Customers could sell their home and down-size, but many would prefer to stay in their home. For these types of customers, equity release is an option which should be considered. In addition, equity release has many other uses. For example, it can be used to re-structure debt, extract capital to use for specific purposes, such as paying for alterations to the home so people can stay resident there, purchasing a second home, helping children to get onto the property ladder, paying for children’s school and university fees and to mitigate inheritance tax (IHT). The potential range of uses of equity release is very wide.
Why have intermediaries not come into the market?
In discussions with a number of brokers, the answer appears to be that many view the risk to reward trade-off as unattractive. The products are seen to be inflexible and expensive and the risks from potential mis-selling are seen to be high. The costs are seen to be significant, particularly in terms of the length of time involved in the sales process from the adviser and the rewards, in terms of commissions and fees, are seen to be insufficient.
In reality, the situation today is very different. The products available today are much more flexible and, at a headline rate of 6 per cent, are priced competitively. Lifetime mortgages, the principal type of equity release product sold today, have been regulated by the Financial Services Authority (FSA) since October 2004 and the sales process is well prescribed. Training is relatively straightforward and the compliance process is well documented. In order to help with compliance, intermediaries involved in the market have typically set up specialist units, to which leads can be referred. Customers are required to get their own independent legal advice, consequently so long as advisers follow this sales process, the risks are no higher than for any other advised sale. Much of the admin chasing is carried out by the customer’s or mortgage provider’s solicitor, and only one or two meetings with the customer are required, with some advisers using telesales rather than face-to-face meetings. The rewards in terms of commissions and fees paid by the customer are attractive, with advisers earning in excess of £1500 per case.
Wider client relevance
The types of customers taking out equity release loans are changing. In the past this was caricatured as 70 year-old plus homeowners with few alternatives. As product design has changed, equity release products are becoming increasing relevant for younger (55 plus), more sophisticated customers who want to retain control over their money and view property as part of their overall assets. Property prices have increased, such that, for many customers, a significant amount of their assets are tied up in property. Lifetime mortgages are a way of extracting cash from their property, while retaining full control with the additional benefit of potentially mitigating IHT.
The other concern intermediaries have is generating leads. There are a number of ways we have identified to help intermediaries with this. Importantly, the target customer group is well defined and word of mouth among this group of customers is an effective low cost way of generating business. In addition, it is possible to target a younger age group, such as those looking to get onto the property ladder. By selling an equity release loan to the parents, the intermediary also has the potential to sell a mortgage to the child.
In summary, we believe that now is a great time for intermediaries to re-evaluate their approach to equity release. It is important you get the right training, but with the right sales process, the risks can be mitigated and the rewards material.
People used to think of equity release as a product of last resort but that simply isn’t right any more. The new generation of products are much more flexible, their pricing is very attractive, and they answer a multitude of financial needs.
