Equity release: Sitting on riches
Equity release has not always had the best reputation. Tales from the 1980s of uncapped payments, homes falling into negative equity and repossessions may have faded but are far from forgotten.
But times are now changing. Public backlash and regulation forced the industry to pull up its socks and make consumer protection a greater priority. And while the credit crunch knocked some companies out of the market, new products have been developing in recent years to attract asset-rich, yet cash-poor, baby boomers.
Demand is certainly on the rise. Figures from trade body Safe Home Income Plans (SHIP) show that in Q4 2011, 4,399 plans were sold – the greatest number since Q1 2010 (4,716). Over the full year, £788.6m was advanced in equity release to 16,095 customers.
While images of equity release conjured by cheerful adverts showing sixty-somethings planning to build a new garage may be hard to shake, new ideas and uses are on the horizon. People are using equity release to supplement their income, support family members, clear debt or adapt their home to delay moving in to care. Some commentators have even mooted equity release as a future solution to the care fees-funding crisis.
SHIP’s most recent figures show that 90% of equity release sales on schemes it approves are through intermediaries, demonstrating the contraction in companies with a direct sales force and the added value seen in consulting an adviser for a complex product. While the number of plans available is far from vast, several providers are leading the way in product development.
Spot the difference
There are two types of equity release plans available: lifetime mortgages and home reversion plans.
A lifetime mortgage involves a loan being taken out and secured on the home. These products first became regulated by the FSA in October 2004. Most common is the ‘roll up’ mortgage, where interest on the loan is ‘rolled up’ and added to the loan to be repaid when the house is sold. The loan can be paid as a lump sum or through regular income.
Although few and far between, an interest-only lifetime mortgage loans a lump sum and monthly interest – fixed or variable – is paid on the loan through the duration of the plan. The original lump sum is repaid when the house is sold.
Home reversion schemes work in a slightly different way. They are not loans, but rather part or all of the house is sold to a provider for a cash lump sum or income. It is usually bought at below market value since the customer will remain living there until they die or move into care. A lease is agreed between the parties, the terms of which vary and may include a nominal rent. This type of equity release became regulated by the FSA in April 2007.