Equity ReleaseOct 4 2021

HNW clients ‘more comfortable’ about debt in retirement

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HNW clients ‘more comfortable’ about debt in retirement
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High-net-worth clients are “more comfortable” now than they have been historically to carry debts into their retirement, a Knight Frank Finance executive has said.

David Forsdyke, a former FCA employee who helped bring the Mortgage Market Review to bear, now heads up Knight Frank’s later life finance arm.

He told FTAdviser clients approaching pension age are no longer scared of debt when it comes to releasing equity from property, as the population continues to age and pension pots keep getting smaller.

“People’s attitude to their property wealth is changing,” he explained. “Generations used to see property as a separate asset which needed to be ringfenced for their children.”

Now, Forsdyke is seeing people reaching retirement “with a very different attitude”.

“They see [their property] as part of their financial make-up, rather than as an isolated asset” he explained. 

“Clients are more comfortable to carry debts into retirement,” he added, pointing to the rise in popularity of equity release products - which have reached a 15-year high this year.

“People are disappointed in their pensions, so they’re looking at property assets which have grown tremendously over the last few years,” Forsdyke continued, pointing to double-digit house price growth since the pandemic began.

“We’re all living longer too, so we’ve got to find a way to make our resources last longer. A lot of people in their 80s and 90s are sitting on property which has grown in value, but their pension pots are running out and they need care.”

At Knight Frank, Forsdyke’s later life finance team advise on equity release loans averaging at around half a million, with average property values sitting around the £2m mark.

If they can get money out of their estate, then they can plan better for IHT.Forsdyke

“We’re seeing wealthier homeowners using equity release in very different ways,” said Forsdyke.

“A lot of wealthier people want to re-distribute their wealth [through the product],” he explained, as opposed to using if for small home improvements.

“More savvy, wealthy homeowners realise they’ve been quite lucky with property values, and they also realise how difficult the housing market has been for the younger generations.”

This is where the inheritance tax angle comes into play, according to Forsdyke.

“If they can get money out of their estate, then they can plan better for IHT. They can use property as a way to generate income. We often talk to financial planners, who highlight the fact that a client's pension fund will be taxed differently to their property with IHT.”

Whilst a person’s pension isn't usually part of their taxable estate, property can be taxed at up to 40 per cent, meaning drawing money out of a property early can avoid some of this tax.

The decline in interest rates across all mortgage products in recent years has also benefited lifetime mortgage products.

“The cost of equity release has come crashing down,” said Forsdyke. “Wind the clock back three years, and we were talking about interest rates of 5 or 6 per cent. Now market leading rates are at 2 per cent.

“That’s led to a shifting attitude because people can access borrowing more cheaply. For a wealthy individual, the ability to borrow at 2 per cent suddenly throws a different light on how they can use their assets.

“Clients tend to be more rate sensitive. A slight difference can make a huge difference on a large loan. So they pay a lot more attention to the interest being paid.”

Dubbing equity release a “prime property market”, Forsdyke reckons it’s only set to grow with a lot of high-end property still owned by older homeowners. “The growth in this space is inevitable,” he said.

The Equity Release Council’s 'Home Advantage' report, published in August, found the majority of UK homeowners (57 per cent) are now interested in accessing money from the value of their property in later life. 

Knight Frank began its later life mortgage advice service in July 2019. Just over two years old and just six advisers strong, Forsdyke reconciles this growth with the need to do it “the right way” and “under the banner of quality advice”, he says.

ruby.hinchliffe@ft.com