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Towards a brighter future

Equity release is one of the few financial markets that is growing in the UK, but it is a sign of the times that this is probably because it is one of the few areas in which there is still an opportunity for advisers and lenders to make their mark.

With the downward trend in interest rates has come the natural but unwelcome corollary of reduced savings income for many individuals, often those who can afford it least – mature consumers. So equity release in all its forms is increasingly being seen as something of a lifeline – a genuine and acceptable alternative source of income.

So the question for lenders is – if equity release is such a potentially significant growth market why are they so slow to embrace it?

It could be that the negative press coverage of equity release in its early days is still putting lenders off – bad publicity that was often provoked by less reputable and in some cases downright questionable product providers.

But the times they are a-changing. Indeed, some would say they have already changed. The market is now regulated and the average age of equity release customers is falling, with some looking for funding in their pre-retirement years.

There are other factors in play too. Government policy will almost certainly have a significant impact on growth in this market as elements such as the withdrawal of funding for higher education tuition fees and the growing perception that state provision for older people will decline affect both long-term care and pension provision.

As long ago as 2001 the Department of Health issued advice to local authorities that long-term care costs could be charged against individuals’ homes rather that forcing properties to be sold.

More recently, there have been fundamental changes to the home improvement grant regime operated by local councils, with increased emphasis on owners taking out loans against their homes to fund repairs to owner-occupied properties.

So the question becomes even more pertinent – if equity release is a growing market why aren’t all lenders offering equity release products?

Well first, there is the simple structural reason that by their nature equity release loans do not provide immediate cash flow to lenders. Their benefit is longer term, based on the age and mortality profile of borrowers.

Another reason could be the significant lack of broker knowledge of the marketplace – many consumers may simply not be aware of the equity release option. Or could it be that consumers have a residual fear of the bad publicity mentioned earlier?

On the other hand, it could go deeper in the lending industry – perhaps a lack of understanding about the fundamentals of the equity release market or even the product itself.

Of course, it could simply be confusion about what is needed to administer equity release loans sufficiently swiftly and cost-effectively to succeed.

So what products are available? At present lifetime mortgages and home reversion plans are on offer – both regulated by the Financial Services Authority. This is an exciting lending area with plenty of scope for product innovation and potential for new entrants to make their mark.

General product features mean equity release can liberate a substantial amount of cash. Loans can be arranged for borrowers from the age of 55 who still own their homes. They can remain in them for the rest of their lives so any growth in value belongs to them.

Add to this the fact that cash is available either as a lump sum or regular income, that borrowers can still move home subject to certain restrictions, and with home reversions they know the proportion of the value of their home their beneficiaries will get and you can see why hard-pressed 50-somethings are increasingly sitting up and taking notice.

They can even find loan options where no payments are required until their home is sold, other than any upfront charges that may apply.

Equity release requires a degree of tailored servicing functionality but this does not mean major system enhancements which should prohibit lenders from entering the market. They are key to administering and servicing equity release books successfully, taking account of factors such as:

  • Interest roll-up
  • Zero-interest charging for shared appreciation contracts
  • Suspending payment collections without unbalancing accounting
  • Managing lifetime loan redemption formulae which can require calculations using historic base and gilt rates
  • Adapting existing residential Key Facts Illustrations
  • Building and delivering products that offer drawdown features based on initial property valuations.

    So what does the future hold for this market? We’re going to be bold and state that growth in equity release will happen and that it will happen with speed and certainty among the lenders prepared to get involved.

    All that is needed to set the wheels in motion is for lenders – or even one large lender – to offer innovative equity release products to the market which will build consumer confidence. After that the sky’s the limit.

    Below is what some of the professionals we have worked with think of the prospects for equity release.

    Jon Hall, financial director, Saffron

    The equity release market has shown itself to be relatively resilient. In 2008, a 9% year-on-year decline in the value of lending and a 4% fall in the number of plans sold meant the sector held up far better than mainstream lending – lifetime mortgages in particular.

    Council of Mortgage Lenders figures showed overall mortgage lending was down 30% in the same period.

    A key element in our decision to be-come an equity release lender was trade body Safe Home Income Plans requiring its members to provide customer guarantees and define standards for product provision.

    Also, from 2004, lifetime mortgage regulation was undertaken by the FSA. The long-term commitment required with an equity release mortgage makes it important that borrowers and everyone around them are comfortable with their decision. This is why our products are only available through IFAs – typically via a similar process to conventional mortgages.

    Equity release is likely to play an increasingly important role in supplementing pension income and paying for domiciliary care, allowing people to stay in their homes for longer and helping children during the parental lifetime by providing a deposit to buy property or reduce mortgage payments.

    The equity release market is expected to grow in the UK for a number of reasons such as the ageing population, concern about long-term care costs compared with the adequacy of pensions and the high proportion of assets tied up in property.

    I believe regulated equity release plans have a lot to offer. What is needed now is action on the part of government, the FSA, consumer bodies and SHIP to en-sure older home owners are given good advice to help them realise the potential of equity release.

    Paul Wilson, managing director, more2life

    When Key Retirement Services decided to launch its own mortgage lender, more2life, an important factor was the use of technology to ease the process.

    Phoebus quickly became the front-runner in the IT tendering process due its understanding of the needs of equity release providers.

    Throughout the development process the software specialist proved it could meet challenges with solutions that delivered our application on time and gave us a platform that was both scalable and easy to maintain.

    The Phoebus application enables us to process business quickly and in an uncluttered way. As a result, we have been able to transact business much more efficiently than we originally thought possible – a vital consideration in the current economic climate.

    Also, Phoebus worked in partnership with us. This was particularly conducive to getting the system we needed on time and right first time. Now, after the first 12 months of operation, we are looking forward to building on this relationship to deliver profitable services in the future.

    Peter Turley, sales and marketing director, New Life Mortgages

    We are well into 2009 and once again many pundits are predicting that this will be the year in which equity release takes off and finally fulfils its potential. But will it?

    One theory as to why this has not yet happened is that not enough IFAs want to sell the product.

    I believe there are a couple of factors in play which will probably mean there will be little net change in the numbers advising on equity release.

    On one hand, intermediaries need to LSearn a crust and there are few enough loaves in the conventional mortgage market to chew on at the moment. There could be migration towards one of the few niches that has been little affected by the radical diminution in the lending market.

    On the other hand, advisers now need relevant qualifications to sell equity release products and there is a reluctance to devote the necessary time, effort and cost to this.

    It may be that in the end it is consumers, faced with increasing debts in later life, falling pensions and increased life expectancy, who force the market into a sales spiral. But when?

    One thing is certain – the systems and processes required to enter the market are tried and tested and do not represent a barrier to entry. In fact, quite the re-verse. If our experience of originating, servicing and managing third party portfolios with our technology partner Phoebus is representative of the industry, any potential new provider will find this the least of its problems.

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