Equity release

Current issues

Introduction

Equity release products provide a mechanism whereby elderly people owning their own homes can release part or all of the value of their homes (the equity) in order to provide them with either cash or an income (or both).

Products to achieve this aim have been around for over 30 years but Home Income Plans achieved a level of notoriety in the late 80s when a number of “unsafe” schemes were marketed which were not suitable for the purpose. The product remained unpopular for a number of years therefore as a result of the mis-selling scandal that followed.

Since the launch of Safe Home Income Plans in 1991 strenuous efforts have been made to restore confidence in the market place by offering a framework for “safe” products which can be purchased with confidence. In recent years sales have grown twenty fold since the low point in 1994 with over £500M worth of equity being released in 2000.

Demographics

One of the big drivers for this growth has been the change in the age profile of the population in particular the growth in the over 65’s many of whom are homeowners. It has been estimated that in excess of £400 billion worth of unmortgaged equity exists amongst the over 65 age group. This is an obvious source of funding for the needs and aspirations of these elderly people particularly if their income in retirement is insufficient to meet their requirements. For those relying on state pension this will increasingly become important as the real value of this benefit declines.

Long Term Care Provision

A recent press report showed that the number of homes being sold to fund long-term care costs has risen by 75 per cent in the past 5 years with 70 000 homes being sold last year. Long-term care costs for the authorities are spiralling and the government is looking for innovative ways to resolve the funding difficulties without changing the fundamental principle of means testing benefits.

For those who are able to plan for it insurance solutions exist but they are expensive particularly if the intention is to fund the full provision of costs. If unmortgaged equity in the home exists there is an opportunity to provide funding for long term care either directly or through the purchase of an appropriate insurance contract. Depending on individual circumstances this may well be a more prudent approach than simply waiting for a possible onset of the need for long-term care and then being faced with the need to sell the property.

Equity Release may be particularly helpful if domiciliary care is an option. Indeed the government has already announced their intention to allow local authorities to fund long term care by offering mortgages on the homes of those requiring care. The details of this proposal are still being developed and we hope that this aim is achieved through a public/private partnership utilising the existing Equity Release plans available through financial institutions. Clarity on how this will work as well as the changes to the funding of long term care by local authorities is anticipated later this year.

Consumer Choice

For a long time equity release products have been a niche market with only a few smaller companies offering the products. With the return of confidence in the past few years a number of larger companies have entered the market notably Bank of Scotland Barclays Northern Rock Norwich Union and NPI and they have had considerable success indicating that when properly constructed and explained there is very strong consumer demand for this type of product. The entry of larger institutions with strong brand names improves awareness of the product. The market is immature but with a number of financial institutions preparing to enter this arena in the next few months and years the market will become more competitive enhancing consumer choice and improving value for money.

Regulation

Having had one misselling scandal with this type of product it is vital that the industry avoids making the same mistake again. The SHIP Code of Conduct followed by the majority of providers in the market place provides a sound structure of consumer protection. This is particularly important in the non-regulated part of the market – reversion plans but is as relevant for mortgage based plans where specific safe guards do not exist elsewhere in regulation. The Council of Mortgage Lenders (CML) is developing a Check-list for their members which will help broaden understanding of the specific protections appropriate for the elderly in addition to the standard Mortgage Code.

The Government is committed to statutory regulation of mortgages and has recently published a Consultative Paper and Draft Sourcebook (CP98) in this regard. Equity Release has a chapter of its own in the draft Sourcebook. The emphasis in the draft is on fuller disclosure of terms risks etc. Regulation is due to take effect at N3[1] currently expected to be August 2002.

The proposed regulation is to be welcomed as it will improve standards in an area where safeguards need to be strong. The SHIP Code will still be important as this goes further than the proposed regulations in areas such as minimum product standards and conduct of reversion business and will continue to protect consumers in the period before N3.

Summary

Despite having been around for 30 years equity release is in some ways a young market but with demographic and fiscal changes demand is set to grow rapidly in the next few years and the generic product will become a mainstream product as more and more household names offer their version. As long as the products are suitably protected by regulation either through voluntary organisations (SHIP CML) or through statutory regulation supported by further (voluntary) codes the consumer can purchase with confidence.

Mark Goodale Chairman of SHIP
Safe Home Income Plans
1^st Floor Parker Court Knapp Lane
Cheltenham GL50 3QJ.
Email address: info@ship-ltd.co.uk
(website – www.ship-ltd.co.uk)

References

1. N3 is the adte at which it is planned that mortgage regulation by FSA will come into force. It is expected currently that this will not be later than August 2002.