Changing face of equity release advice

JON KING, MANAGING DIRECTOR, HODGE LIFETIME
JON KING, MANAGING DIRECTOR, HODGE LIFETIME

Equity release plans were first introduced to this country in 1965 and Hodge Lifetime was one of the founding providers, albeit under the name of Home Reversions Ltd. So equity release was launched into a world of miniskirts, Morris Minors and The Rolling Stones.

And just as Mick Jagger has never left us, neither have some of the original concepts of equity release, with products such as home reversions standing the test of time. But as we enter a new decade in the midst of one of the deepest recessions since World War II and with a large number of people approaching retirement, this seems like a good time to reflect on what has been and what is yet to come for this resilient product.

The equity release market has been through many ups and downs since the first product appeared. In the mid-1960s home reversions were the only option available to clients and those who chose to release equity from their homes did so to make ends meet.

The 1970s saw the launch of early home mortgage plans. But it was in the late 1980s and early 1990s when the direction of equity release really changed as income plans – buying investment bonds alongside interest-only mortgages at a time of rising interest rates and falling house prices – left many clients in arrears and negative equity.

Equally, the shared appreciation mortgages of the mid-1990s when house prices were rising beyond all comprehension marked another significant tangent. To combat a potentially fatal turn in product innovation Safe Home Income Plans was formed in 1991 as a trade body for the industry to offer kitemarks to providers and guarantees to consumers that are still applicable in today’s market.

Baby boomers are also silver surfers, and advisers and providers who ignore the internet do so at their peril

But irrespective of the twists and turns along the way it is clear that the fundamentals propping up the equity release sector remain the same. Property prices have continued to rise, the number of people living longer has grown, pension values have declined and home ownership has increased significantly among older people.

The government’s Right to Buy scheme and buy-to-let investment have combined to create a greater number of older consumers owning their homes outright, and thus a greater number of individuals eligible for equity release.

And the fundamental reasons for taking out these products have not strayed far from those of the 1960s either. While no longer used solely to make ends meet, older home owners still report taking out equity release for peace of mind or to improve their quality of life. In a recent survey of our customers 48% said they chose equity release predominantly to make ends meet.

So where do we go from here? We have seen that equity release is a product choice that has stood the test of time, with fundamentals that have secured its continuing presence in financial planning for older home owners. But it would be short-sighted to overlook the changing nature of the equity release market.

Product development and innovation is always shaped by the socio-economic landscape and individual client requirements – this has been true for equity release in the past and will remain so in the future. But now it is the turn of the baby boom generation to take an interest in equity release. This generation will bring fresh demands and requirements to the product.

Baby boomers not only want to supplement a decreasing pension income, they also want to draw on money tied up in their homes to fund a lifestyle they have become accustomed to during their working life.

Matching their experience of flexible banking facilities and comparison websites for financial products with an increased awareness of using their money to maximum effect means this generation could be the first to take flexible equity release products into the mainstream.

In fact, I would not be surprised if product providers are increasingly asked whether clients can take out equity release for buy-to-let properties or holiday homes in the coming years. There is already more focus on variable interest rates and lifetime leases and I don’t think it will be too long before the government is forced to make its thoughts on introducing its own plan known. If not a government plan, proposals for introducing guarantees or insurance for product providers to underwrite risk could be called for.

Access to products is another area that will have to change if the next generation’s requirements are to be met. It will be interesting to see if new provider types will step forward such as credit unions, or we see a government advice line established such as that in Australia.

Meanwhile, the Retail Distribution Review and the debate on funding for long-term care will pose interesting questions for brokers and could alter the advice landscape considerably.

Advice has always been positioned as key to equity release – indeed, some may argue that the sector has been stifled by the advice-only model.

While I believe specialist advice will remain imperative for all forms of equity release products it will have to adapt along with the distribution model.

Baby boomers are also silver surfers, and product providers and advisers who ignore the power of the internet in distribution do so at their peril.

So the big question is – how will such change come about? Well, I believe this is a matter of changing public perception. The ultimate test will be to get equity release considered in the same way as credit cards or savings are. If clients call for an equity release product in the same way as an overdraft providers will emerge to meet the demand.

Finally, to cement equity release in the national consciousness individuals need to understand the importance of their property when it comes to retirement with a ’state of wealth’ statement highlighting the amount of equity clients have and thus can use to fund their lifestyle as they grow older.