I'm a child of the Seventies so I grew up on a TV diet of some of the finest comedy classics like Some Mothers Do ‘Ave ‘Em and The Good Life.
I was watching an episode of The Good Life recently – it was one I didn’t recall from my childhood, a Royal Command performance that featured a rather worried Tom Good starting to fret about old age.
How would he and Barbara cope once they reached their dotage and were no longer able to look after their ramshackle ‘farm’? More to the point, what would become of Barbara once Tom died? With no pension savings to fall back on and no income, the future looked bleak.
He comes up with a solution and tries to persuade his bank manager to buy into it.
In essence, he wanted the bank to give him a loan – enough to give him and Barbara a reasonable income in retirement – and in return the bank would get his house to sell once they were both dead.
The scheme hinged on Tom’s house – which he said was worth “£25,000” – increasing in value to help pay back the debt, plus interest.
The rather skeptical bank manager declines the ‘offer’, among other reasons because he is not convinced the house value will ever increase enough to cover the debt.
What Tom was describing to his bank manager of course was a form of home reversion – effectively selling his property to the bank in exchange for a cash sum and the right to live there until both he and his wife were dead.
Fast-forward to today, and the market for equity release – lifetime mortgages and home reversion plans – is huge and growing year on year.
What might have seemed like a hair-brained idea back in the late Seventies has now morphed into a vibrant and vital market place.
And yet the size of this market (£1.4 billion of loans in 2014 and predicted to be closer to £2 billion this year) is tiny in comparison to the almost £1 trillion of housing wealth owned outright by today’s 65+ homeowners.
So why isn’t the equity release market much bigger? Why isn’t it £5 billion, £10 billion, £100 billion even?
Perhaps part of the problem is an underlying skepticism about the products. Tom’s bank manager simply could not comprehend the 5-fold increase in house prices required in order to repay the debt. Today, it is a different sort of skepticism. It’s not house price inflation that people are worried about, but the products themselves.
Research that more 2 life carried out recently showed that while 44% of homeowners now regard their property as part of their retirement assets, a worried 47% of those aged 65 and above simply don’t trust equity release products. 51% said they wouldn’t use these products because of high rates while 41% said they were worried about inheritance.
What this research underlines is the need for greater education of consumers about the benefits of equity release. Many will be unaware of the fall in interest rates in recent years – we are now seeing rates around the 5% mark and surely soon to see rates that start with a 4. There are also of course safeguards in place – such as the ERC’s No Negative Equity Guarantee – to ensure that the debt does not spiral out of control and become a burden for the next generation.
As the pension reforms bed down and more and more people start to look beyond their pension savings and start to consider other assets at their disposal, many will come to realise that their home can provide a significant boost to their retirement finances.
With the average house in the UK today worth almost ten times the average pension pot, equity release could provide the path to a much more comfortable retirement and provide more options for a client’s changing needs.
As an interesting footnote to all this, the very house used for filming the series (in Northwood, Middlesex) last changed hands in 2001, for £475,000 according to Right Move – roughly four times the loan plus interest Tom had been looking for. His bank missed out on a tidy profit there.