Making equity release part of the advice toolkit

As early as 1991, the government was addressing the scandal of home income plans and shared appreciation mortgages, which were promoted heavily to consumers in the 80s and 90s.

However, the products were unsuitable for many people, with extortionate costs and high interest on the loans, leaving them in debt or even seeing their home repossessed.

The government’s response was to set up a committee of regulators to examine problem cases.

The market has evolved to become a retirement planning tool for many Rob McCoy

However, according to Hansard notes from a 1991 debate on home income plans (investment bond schemes), this was not good enough.

Hansard notes the Rt. Hon Lord (Paul) Boateng, at the time MP for Brent South, said: “I registered my concern and that of hon. members of all parties about the thousands of pensioner households which had been inveigled into making investments in wholly unsuitable home income plans.

“We see no evidence the problems have been dealt with adequately.”

Despite the regulation of the sector, in an interview with ITV’s Tonight with Trevor McDonald in March 2007, Martin Lewis, founder of MoneySavingExpert, said equity release would be ‘up there’ as a scandal with endowment policies and payment protection insurance.

Following this, the then Liberal Democrat shadow chancellor Vince Cable joined the calls for the FSA to review the selling on of SAMs and to assess the levels of additional charges.

Too risky or specialist?

Although equity release has moved on since then, there are still advisers who do not consider the product. Mitch Hopkinson, head of advice for deVere UK, explains: “Some advisers have shied away from this as it is a relatively immature market place and is considered still by many to be ‘risky’.

“It is a highly specialised area, and therefore, understandably, it tends to be only advisers within robust organisations that have experience and rigorous processes who are prepared to do equity release.”

Dean Mirfin, technical director at Key Retirement, agrees: “Many firms specialise. For example, some advisers may not work with older clients, and where this is the case we are seeing them establish referral arrangements for certain types of business, including equity release.”

Suitability is also about advising on the alternatives, looking at other forms of borrowing, using other funds which a client may have, or downsizing Dean Mirfin

Mr Mirfin adds there are now more than 65 equity release plans available, and research is “ever-complicated”, he says.

“There is no real answer to how any adviser transacting little volume of any type of product should want to, or be considered to, have sufficient levels of knowledge and competence to do so.

“The way to include equity release in advisers’ toolkits will remain to have a good referral partner to work alongside.”

Suitability

Christine Newell, mortgages technical director at Paradigm Mortgage Services, comments: “Clients should be aware the product is generally for the life of the client, so using this scheme as a short-term fix to solving a financing problem is not what it is suitable for.”

A factsheet from over-50s specialist Saga states two cardinal rules by which clients should abide:

■ Never owe more than your property is worth

■ Never release more money than you need.

One could also add: Never borrow more than you can repay.

John Mahon, head of equity release securitisation for Aviva, adds equity release “might not be suitable for people who know they want to move house (although the mortgage can be ported to some other properties), or those with a strong desire to leave the whole wealth of their property as an inheritance.

“All customers must take financial and legal advice before they take out a lifetime mortgage and we also recommend they involve their family in discussing the matter.”

State benefits must also be factored into the equation, as taking out an equity release mortgage could affect the individual’s entitlement to state benefits.

Add to this possible arrangement charges, which the Money Advice Service says could be between £1,500 and £3,000 in total, as well as any legal and advice fees, and equity release may prove impractical for some clients.

According to Stuart Wilson, managing partner for the Later Life Academy, “the only client who should never do equity release is the one who simply does not need the money”.

He believes equity release is most suitable to customers who “need the capital, and who have analysed and compared their full range of alternative ways of raising this”.

He explains: “The fact is interest will be charged as it is borrowing. This may or may not compound. If they have readily available cash on deposit getting a low rate of interest, then this generally would be the cheapest source of cash.

“Likewise, they should consider the practical benefits and costs of downsizing, but consumers must talk all the options through with an adviser and their family.”

Mr Mirfin comments: “Suitability is also about advising on the alternatives, looking at other forms of borrowing, using other funds which a client may have, downsizing and assessing whether the family could help the client financially.

“Alternatives are always discussed at length to see whether these are viable or not.”

Type of client

In the past, says Rob McCoy, senior products manager for Sesame: “Traditional equity release customers would have been labelled as ‘asset rich, cash poor’”, which may have put off some financial advisers.

However, he adds: “The market has evolved to become a retirement planning tool for many.”

Moreover, the type of client has evolved. Stephen Lowe, group communications director at Just Retirement, says: “The typical user is aged 69, but we have seen the age of lifetime mortgage users getting younger over the past five years.”

Mr Mahon agrees: “There’s a perception all customers are older people who have run out of money but that is not the case.

“Almost 18 per cent of new equity release customers in the second half of 2015 were aged 55 to 64.

“That’s people supplementing their retirement income before they get their state pension, or people paying off existing debts.

“Some customers use it as part of their inheritance planning, while others use it to pass on a ‘living inheritance’.”

In 2015, Aviva released a factsheet highlighting different types of consumer for whom equity release might be suitable. These are:

■ The former mortgage customer

■ The far-sighted pension holder

■ The underwelmed annuity holder

■ The conspicuous consumer

■ The maturing interest-only mortgage holder.

■ The full two-sided A4 document can be found here.

Two of these theoretical studies are highlighted below: the underwhelmed annuity holder, who needs supplementary income, and those whose interest-only mortgage may be coming to an end, but whose chosen repayment vehicle may not cover the remainder of the mortgage debt.

Property eligibility

Stephen Lowe, group communications director for Just Retirement, says advisers should consider eligibility for each client based on a range of factors.

He explains: “Not all homes are eligible, so someone who may have a flat above a shop, an ex-local authority property or live in sheltered accommodation might find it more difficult to satisfy the lender’s property criteria”.

He adds: “Clients will need to consider how long they intend to live in the property and if they wish to downsize or move into a retirement village. While lifetime mortgages are portable, there are strict criteria the new property will need to fulfil.”

Such criteria include:

■ If the client is moving to a lower-value property, they’ll usually have to repay part of the lifetime mortgage.

■ If the adviser/client can’t transfer the scheme, the client will have to repay the whole mortgage when they sell the property.

■ There may be charges if the client repays the loan early.

The roll-up of interest might also mean the client has less to buy a new property with.

Pension planning

Simon Chalk, equity release expert at Age Partnership, says: “Pension freedoms and being able to pass on the pot tax-free to family should lead to more advisers looking carefully at equity release options.

“Creating a debt against the family home might make more sense than stripping out a pension fund.

“Only by considering equity release on an equal standing with all other means of securing an income can advisers dismiss it as being either not at all right, or just not right for the present time.”

Aviva’s Mr Mahon points out: “It isn’t right for every client. However, 32 per cent of people surveyed by Aviva felt comfortable with using their home as an extra source of income.”

Aviva: Over-45 homeowners’ attitudes to property wealth in retirement planning

Source: Aviva

Mr Mahon adds: “Equity release is just another tool for advisers to help clients with all aspects of financial planning.”

Dan Baines, commercial director at Age Partnership, says: “Those active in the mortgage market are happy to engage with customers on preferences around capital repayment or interest-only products, so why not also cover roll-up and interest-only lifetime mortgages for those who qualify?

“Equally, advisers who specialise in pension income should ask whether they are doing enough to cover the use of home equity in achieving their customers’ retirement goals.”

Professional partnerships

Rob McCoy, senior products manager for Sesame, says: “Some advisers do not believe they have sufficient equity release customers in their database to justify the costs involved in obtaining the necessary qualifications and regulatory permissions, as well as the additional ongoing compliance monitoring.

“For advisers who don’t wish to write equity release business themselves, they could also look to introduce potential customers with these particular needs to another suitably qualified adviser or firm which specialises in this area.”

Ultimately, specialist products require specialist knowledge, says Nigel Waterson, chairman of the Equity Release Council (ERC). He adds: “The Council exists to promote high standards of conduct and practice in providing equity release products and advice.

The ERC’s work will help aspiring entrants and support to recent arrivals, as well as encouraging new relationships with practitioners in related areas. Nigel Waterson

“This work will help aspiring new entrants and provide additional support to recent arrivals, as well as encouraging new relationships with practitioners in related areas such as residential mortgages and later life planning.”

The ERC’s directory of advisers can offer a range of qualified advisers for referral purposes. Age Partnership also has a referral service.

Education

According to Mr Waterson: “Later life financial planning is an increasingly complex landscape, which makes it difficult for anyone to become a specialist across the spectrum.

“Education and awareness is crucial to encourage advisers with complementary areas of expertise to work together, form relationships and refer customers for advice on products which may be appropriate for their circumstances.”

There are also resources, such as online calculators, which can help clients work out how much they would have to repay, and the effects of compound interest, as well as downloadable guides.

These include:

Age UK

Aviva

Money Advice Service - printable guide

Saga