Not the 'last resort'

Equity release is never far from the news and moving into 2006 it seems this is unlikely to change anytime soon. 2005 proved to be a bumpy year; the less-than-satisfactory FSA equity release review in May, which uncovered poor advice and selling practices, provided a wake-up call to the industry. Seminars at Mortgage Business Expo in London last November focused on overcoming preconceptions and common myths surrounding the sector and promoting the importance of independent, qualified advice. The wheels are also in motion to bring home reversion schemes under the FSA’s control, which will enhance standards of consumer protection. Much laudable work has been done in a few short months but once again equity release is in the news for all the wrong reasons.

Research undertaken by consumer magazine Which? has come to the conclusion that equity release schemes are ‘high-risk’, ‘expensive’, ‘inflexible’ and liable to become a ‘financial nightmare’. Editor Malcolm Coles says the plans should only be used as a last resort when all other options – for example, borrowing from friends or family, downsizing or eligibility for state benefits and local authority grants, are exhausted.

The industry though has, on the whole, no argument with this. Roger Hillier, product development manager at Mortgage Express, says: “We have always said equity release is by no means a mass market product and is not suitable for everyone. It is a niche product that is a good option for the right customer. Which? rightly mentions some key considerations for the customer and their family. However, there are many more aspects that the adviser will explore with the customer before any recommendation is made. To ensure all issues are covered Mortgage Express recommends advisers refer to the Council of Mortgage Lender’s (CML) Lifetime Mortgage Good Practice Notes.” Simon Chalk, a CeLM qualified mortgage planner at Mortgage Portfolio Services, agrees: “Factually speaking, Which? is correct in much of its comment. It’s quite right to point out, as should all advisers following the CML guidelines, that alternatives should be considered first.”

Unbalanced

Where the Which? article fails in Chalk’s opinion is in neglecting to provide a balanced view. Sue Anderson, head of external affairs at the CML, agrees the pessimistic bias makes the article unconstructive. She says: “The actual advice within the Which? article is basically sensible but the negative tone is excessive and very unhelpful. It fails to take account of the fact there are now robust new selling rules in place, as part of the FSA’s statutory requirements on mortgage regulation. These provide significant safeguards for consumers.”

This is echoed by Safe Home Income Plan (SHIP) chairman, Jon King. SHIP, which represents 90 per cent of the equity release market in terms of volume and was instrumental in drafting current and impending lifetime mortgage regulation, was not approached by Which? for input on the article. King says: “The advice from Which? ignores the stringent protection measures already in place with the SHIP code. Our members report customer satisfaction levels of 95 per cent – largely due to the guarantees offered by the code.

“SHIP recognises that equity release deals with a potentially vulnerable class of consumer and would always advise clients to look at all viable options before taking out an equity release scheme. However, we would stress that equity release is not just an option of last resort but can allow many people to enhance their lifestyles post-retirement by capitalising on their main asset,” he adds.

SHIP-backed equity release plans guarantee against negative equity as well as the right to remain in your home for as long as the customer chooses, eliminating these risks. As Julian Lowe, consultant at IFA Ashby London, says: “A lifetime mortgage is hardly a high-risk product where a rate is fixed for the duration with a ‘no negative equity’ guarantee. Good advice will ensure the appropriate product is selected.”

Creating confusion

Mark Howell, head of marketing at Bristol & West, believes the article is in danger of creating confusion rather than clarity due to its generalised approach it takes to a subject where individual circumstances play a significant part. “To simply say equity release products are a ‘last resort’ could be interpreted as ‘don’t touch’ and this does no-one, the consumer and industry alike, any good,” he says. “The article suggests downsizing as its first alternative, and while this is entirely reasonable, one must consider whether this would be better on a cost, emotional and available choice of new home basis for an individual.”

Chalk agrees: “Most of the alternatives are either unavailable to clients or simply unacceptable. I have never had a client that would even consider asking to borrow money from family or friends and invariably they put remaining in the home over moving downmarket.” Dean Mirfin, business development director at Key Retirement Solutions, says: “If Which? wanted to portray the real image of equity release it could have included input from those with positive experiences about why they chose the scheme rather then downsize.”

The examples used to illustrate the piece have also been questioned. Anderson says the scenario of a 70 year old, with a 20 or 25 year lifetime mortgage, although correct, is very different from the equally likely scenario of someone in their 80s, using equity release as a way of giving them an income or more money to maintain their property, and not rolling up interest by the time the property is sold to anything like the same degree. Howell adds: “The cost examples do not highlight that, in normal circumstances, one would expect to see some – although not guaranteed – capital growth which would in part offset some of the cost of the loan.” Chalk argues: “As for products being expensive, compared to what? Perhaps other loan sources with similar interest rates that require payback every month? Expense now or expense to their estate; clients have the choice.”

Advertising

The way in which some equity release products are advertised is also criticised with Which? singling out Norwich Union, whose adverts suggest schemes can pay for ‘lifestyle dreams’ such as a ‘trip to New York’ or ‘something for the family’. For this it has been branded ‘irresponsible’. This is something Darren Carter, personal finance unit marketing director at Norwich Union, has vehemently denied stating the article misrepresents the company’s, and indeed the industry’s, approach towards equity release. Mirfin believes a point to consider is that clients should be able to do what they want with their money. He explains: “The report infers that people should only consider equity release if they are desperately in need of money to live on. Whether clients downsize or use equity release, it is up to them what they use their money for, whether it is an income, a holiday or home improvements. Either way, they should think very carefully.” However, Lowe argues: ”Lender advertising can be over simplistic and I would prefer to see this product sold through IFAs only.”

The regulation of home reversions is expected to be granted Royal Assent and reach completion in early 2007, bringing SHIP’s two-year campaign to rectify the regulatory imbalance in the equity release market to fruition. To bridge this gap, SHIP has established an independent Complaints Board and a Product Confirmation letter. This will not only even out the market and enable advisers to make fair comparisons between the products but raise the standards of consumer protection. The FSA has also released a detailed brief underlining the work it has, and will be, carrying out in the sector over the next few months.

Front of mind

The concerns that Which? described are indeed factors that every adviser who operates in equity release should have at the front of their mind when faced with potentially vulnerable clients. But neglecting to promote the importance of independent, professional and qualified advice is a mistake on Which?’s part. With experts predicting a continued growth of interest in the equity release market, it is becoming a real alternative for many people who may not want to leave their homes or borrow heavily from family or friends. It should not be seen as a ‘last resort’ – rather as another choice for a client, with their adviser’s help, to consider.

As Chalk says: “The point about equity release being the ‘last resort’ is very tired now. Equity release is one of a number of options to be considered. There is no standard order from first to last with equity release, as anyone advising on the subject will tell you.”

Sarah Ardley is a news reporter at Mortgage Introducer