Sharp release

That cash is still being used to pay for holidays and work on homes and gardens, but to a lesser extent as the financial crisis has kickstarted a shift in the motives for taking out the plans.

And while equity release remains controversial, its reputation tainted by previous mis-selling scandals and warnings over unsuitable advice, IFAs increasingly view it as a viable retirement planning device as they look to new ways of bridging the pension gap facing their clients.

Almost nine in 10 IFAs believe the equity tied up in property should be a “key consideration” in planning for retirement, according to research last year by LV=. It also found that 95 per cent of advisers see equity release becoming a significant future growth area for their business, due largely to the need for clients to supplement their retirement income.

Vanessa Owen, head of annuities and equity release at LV=, says, “Demand for equity release has grown considerably in recent years and the majority of advisers now believe that equity release is set to become a mainstream financial product in the next few years.”

At the same time, however, a third of advisers quizzed by the provider admitted that their lack of understanding of the sector had deterred them from writing equity release business.

The sector also has a reputation issue, due largely to previous claims of mis-selling and unsuitable advice. A mystery shopper exercise two years ago by consumer group Which? uncovered poor standards among qualified equity release advisers, with just two out of 22 advisers in the study deemed as giving “excellent” advice.

Among the issues uncovered were advisers failing to disclose their status and fees, poor fact-finding, a failure to explain exit penalties and insufficient discussion of benefits and alternatives.

Serious concerns

Going back to 2005, the FSA told equity release advisers to address “serious concerns” over the advice given to consumers. Its own mystery shopping exercise revealed that more than seven in 10 advisers failed to gather adequate information about customers to ascertain their suitability for equity release, while more than 60 per cent hadn’t outlined the disadvantages of the product.

More recently the FCA warned firms against “shoehorning” interest-only borrowers into equity release when they were at risk of defaulting.

Then there’s the legacy of shared appreciation mortgages (Sams), sold in the 1990s by Barclays and Bank of Scotland. A Sam was an equity release deal in that the borrower would get an interest-free loan of up to 25 per cent of their property value. Crucially, the bank would also get not only the capital repayment, but also a share of any increase in the property value when it sold – and the years following the sale of most of the plans saw a house price boom that left people unable to move or, if they did, saddled with often huge debts.

But while the industry has cleaned up its act – and the banks involved in the Sams debacle were not members of the then trade body, Safe Home Income Plans (Ship) – there is still some unease about equity release.

Despite its growth the sector remains very concentrated, being dominated by a small group of providers and advisers.

Last year, a Financial Services Consumer Panel (FSCP) review of the market concluded that it was blighted by poor competition and consumer choice, pointing to the “inter-relationship” between some of the largest providers and advisers. It also raised concerns over confusing and changeable product terms, high and unpredictable exit penalties, a lack of product innovation and high barriers to new entrants.

A University of Essex report, also published last year, said that “while financial advice is effective for some equity release consumers, it is least effective for consumers who are less well-off or who release equity under financial pressure”.

But the industry argues that standards have improved, thanks in part to the relaunch of trade body Ship as the ERC. The 2012 rebrand came with an expansion of its membership to advisers, surveyors and lawyers and the development of a new code of conduct, set out by the ERC’s standards board.

That includes a no-negative equity guarantee and a “triple lock”, which refers to the FCA’s regulation of the plans and the requirement for borrowers to use both a professional financial intermediary and an independent solicitor.

The code also states that borrowers have the right to remain in their property for life provided it continues to be their primary main residence.

Nigel Waterson, chairman of the ERC, claimed that as the industry returns to growth and more people are aware of the safeguards in place there are only “very low” levels of complaints.

“As a result, we are also seeing an increasing willingness to consider the benefits of drawing on what for many people is still their biggest asset in retirement: their home,” says Mr Waterson.

Alison Mitchell, mortgage expert at IFA Robson Macintosh, agrees that there has been progress.

“The stigma attached to equity release is diminishing rapidly due to new regulations and stricter controls. The products were not competitive and often not flexible at all, but they have evolved into easy to understand, viable options for clients wishing to add to their income, help out family members or just enjoy their retirement as best they can.”

There is still plenty of room for improvement though, says Tom Moloney, advice manager at StepChange Equity Release. He is calling for action on early repayment charges to give borrowers greater flexibility.

“The way that many of these plans are funded means some still carry significant early repayment charges of as much as 20 to 25 per cent of the amount released. This could be a significant charge for any clients needing to repay and could reduce future flexibility.”

He wants providers to minimise the penalty applied following a significant life change, such as the death of a partner.

Mr Moloney also raised the issue of variable interest rates. This refers to the relatively new practice of providers offering lower interest rates to the largest adviser firms.

“Clients should be able to access the same interest rates and plans regardless of who they turn to for advice. They should not be penalised for not using a specific advice service,” says Mr Moloney.

Equity release is typically accessed through IFAs, who now account for 97 per cent of all plans sold, ERC figures show. As the LV= research underlined, however, there remains a degree of reluctance on the part of IFAs when it comes to equity release.

Imperative to planning

But Scott Pentleton, director at Edinburgh-based Alpha Wealth, believes that for advisers it is now imperative to discuss equity release with clients as part of their retirement planning. He points out that for most retirees their property is the largest value asset they have.

“Stagnant, or worse, falling household incomes at a time of growing pressure on the cost of living will lead to an increase in the numbers that consider equity release as a potential way of relieving that financial pressure,” he says.

“There is also the issue of care – free care for all is simply unaffordable and many would like to obtain care while living in the comfort of their own home.”

The ERC has a 12-point checklist guide for those advising on equity release, while it also refers advisers to MCOB Chapter 8 for more in-depth details of the requirements.

MCOB Chapter 8 covers advising and selling standards for equity release and includes elements that will come into force on 26 April this year as part of the Mortgage Market Review.

Under the existing MCOB requirements, firms must take ‘reasonable care’ to ensure the suitability of advice and take ‘reasonable steps’ to get from the client all the information likely to be relevant.

More specifically, they must ensure the benefits of equity release outweigh any adverse effect on means-tested benefits entitlements and the client’s tax position. Affordability must also be ascertained and all alternatives considered.

“It’s vital to discuss alternatives to equity release including trading down, grants, use of savings, financial assistance from any family and so on, both for the current point in time and how any of these alternatives may be relevant in the future,” Mr Pentleton says.

The client’s life expectancy, health, financial circumstances, eligibility for the product, preferences for their estate and future plans must also be addressed by the adviser.

For the advice process to be thorough and effective it’s essential to involve the family. Not only is this good practice, says Mr Pentleton, but it helps protect against any mis-selling allegations and also has the potential to generate further business from the family.

Complaints about equity release products have historically come primarily from dependents, rather than borrowers. In many cases the dependent had come to sell the property unaware that there was a debt to repay, leaving them without an inheritance.

Among the risks and features that should be raised with the borrower and their family are the impact of compound interest; any exit penalties or early repayment charges; the protection offered; and the future portability of the mortgage (which may be restricted to properties acceptable to the lender).

“It is wise to send a copy of your report, with the client’s consent, not only to the family but to the family’s solicitor,” says Mr Pentleton.

“Advising on equity release takes time and patience. It is a decision that can involve the family and there can be differing family interests, but the majority just want what is right for their parents.”

Then it comes down to the type of product that’s most suitable and the providers to consider. It’s a small market in terms of provider numbers, although there have been encouraging developments of late.

January 2014 saw the entry into the market of Pure Retirement, sister company of Age Partnership. The firm, which is a member of the ERC, is the first new provider in the market since June 2010.

The product choice has developed more quickly. A decade ago equity release was typically a lump-sum, roll-up product. Now the most popular options are drawdown – where borrowers can access just a portion of their equity – and arrangements where the client pays interest each month and so avoids the roll-up. Among the providers offering the latter are More2Life, Hodge and Stonehaven, which was recently acquired by MGM Advantage.

Mr Moloney says, “This option makes borrowing via an equity release plan considerably more attractive to many people and eliminates the additional cost accrued as a result of compounding the unpaid interest.”

The Stonehaven product allows the client to choose how much they can afford to pay each month, with the flexibility to stop making regular payments or revert to roll-up (although very few do the latter).

Georgina Smith, managing director of Stonehaven, says, “This is where the growth will be, where a lifetime mortgage becomes more like a mainstream mortgage. More advisers are looking at lifetime products as just a different type of mortgage and they, and their clients, are more comfortable with it.”

Another significant development in product terms has been the introduction of the protected equity option. Also known as inheritance protection, this allows borrowers to effectively cap the long-term cost of the plan at a set percentage of the property value.

Almost bespoke

A further advance has come in the form of more individually underwritten lifetime mortgages, giving borrowers with health or lifestyle issues access to equity release loans. Among the pioneers in this area is More2Life, which launched enhanced products in 2010 and was the first to offer improved loan-to-values to borrowers with medical conditions or lifestyles affecting their life expectancy.

It’s estimated that enhanced loans now account for one in five of all equity release plans taken out.

But the most recent product innovation is the launch of Hodge Lifetime’s retirement mortgage, although it’s a step removed from a traditional equity release plan. Effectively a hybrid of a residential and lifetime mortgage, this offers a lower rate of interest in return for removing or reducing the standard protection usually attached to conventional equity release plans.

The interest-only deal doesn’t have to be repaid until the borrower dies or moves permanently into long-term care. The rate of 4.75 per cent is fixed for five years – after which it becomes variable – and clients can borrow up to 50 per cent of the property value.

“We hope this is the first of many products of this type,” says Mr Moloney. “The standard equity release protections must be priced into every plan. By allowing clients who do not need all these protections to remove them it enables these clients to access plans on lower rates and with more flexible terms.”

Outside the Hodge plan the range of interest rates charged on equity release loans is narrow, with most between 5.5 and 6.5 per cent (having fallen over the past two years). While that seems expensive, almost all lifetime mortgages are fixed for life and therefore have terms typically of 15 to 20 years.

Future product movements are likely to be driven by growing demand from homeowners struggling to repay interest-only mortgages, predicted Dean Mirfin, group director at Key Retirement Solutions.

Eight in 10 borrowers with interest-only loans maturing over the next decade have no repayment plan and risk entering retirement with mortgage debts, the FSA has estimated.

“Products will also build on existing formats to create greater flexibility to meet varying needs within the same product definition,” Mr Mirfin says.

As the product range widens there is extra responsibility on advisers to ensure that once they have ascertained suitability, the various options are explored with the borrower.

“Equity release remains a higher risk in the eyes of the regulator so the advice needs to be spot on,” says Ms Mitchell. “You need to cover all the options available to your client based on their objectives and personal situation. Not only considering the high street but also personal unsecured loans.”

But while the demand is there for equity release some claim that advisers have been slow to take advantage.

“I would like to see a lot more advisers getting qualified and considering equity release for all clients when looking at retirement planning,” says Ms Smith at Stonehaven.

“It’s a small market so advisers ask if it’s worth being qualified. But once they are, they can see the role that lifetime mortgages can play for clients.”