Retirement

007 | Later life planning - Making the most of the equity release market

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Tutor:

  • Jan Holt, Head of Business Development Team, JustRetirement

Learning outcomes:

  1. Describe the equity release market and its potential
  2. Identify the clients who might wish to consider using equity in their homes to improve their financial position
  3. Distinguish between the two main equity release mechanisms – and explain the alternative options available
  4. Outline the key facts that must be understood in the advice process
  5. Understand financial intermediaries’ options for accessing the equity release market

Equity Release Council

Just Retirement adviser website

FCA handbook

DWP website

Council of Mortgage Lenders - guidance notes and codes

Channel

Retirement
Learning outcomes: 1. Describe the equity release market and its potential 2. Identify the clients who might wish to consider using equity in their homes to improve their financial position 3. Distinguish between the two main equity release mechanisms – and explain the alternative options available 4. Outline the key facts that must be understood in the advice process 5. Understand financial intermediaries’ options for accessing the equity release market Tutor: Jan Holt, Head of Business Development Team, JustRetirement The key market dynamics of equity release Jan Holt: Of course, the market’s very much linked to an ageing population, and how we were encouraged, indeed even incentivised in the past, the own our homes rather than rent them. This means that in the UK today over 4½ million homes are owned outright by those aged over 65. Home ownership is very common with 79% of over 55 year olds owning their property. Of those 59% own it outright without a mortgage, and this increases further with people in their 60s and 70s where 84% of people own their own home and have more than £200,000 of equity within it. There’s also a shift in attitude across the retired population. As retirement can span such a long time these days, it’s hardly surprising that many will be looking at how they make all of their assets work for them, including their property. In 2012 the value of equity release mortgages increased by 17% over 2011, with more £925million being released. This represented a 10% increase in the number of plans written. Presenter: But with such high levels of home ownership and home equity, the potential in the market must be significant. Jan Holt: Indeed, much more potential than has actually been realised. Across the UK there’s over £750billion of unmortgaged equity held by the over 65s. If we assume a 30% loan to value this means as much as £227billion could be released. Just imagine the effect that this would have on the economy if it was realised and turned into consumer spending. It very clearly demonstrates the size of the potential market and puts the current market figure of £925million in context. What is being realised currently is merely the tip of the iceberg. Now that isn’t to say equity release is right for everybody, it’s not, but it’s definitely an option worth considering for certain types of client as we’ll see later. The other key point to remember is that not only is property likely to be one of the client’s biggest assets, it may also be one of their better performing ones when you factor in the volatility of world stock markets since 1999. Even though house price inflation has slowed, and in some areas prices have fallen, when taken over the last 25 years average house prices have risen fivefold. So it’s a simple but very significant step for both intermediaries and their clients to think about property as a useable asset should they need to do so. Presenter: So could you expand on what’s driving this opportunity for equity release and some of the issues that might hold people back from taking advantage of it? Jan Holt: Well, looking at what is happening in the current economic climate, it’s easy to see that there are a number of people who could have a need that equity release could help with. The most important thing is that people consider their home as a financial asset. For a growing number of people the question will be when to release equity from their house rather than if. Looking at some more specific examples, there are many people carrying their mortgages into retirement, or those with interest only mortgages coming to the end of their term. This alone could have a massive impact on the equity release market in the near future. There are a large number of people solely reliant on the basic state pension for income, but even those that do have savings are likely to be feeling their purchasing power eroded by inflation. The reality is that many retirees have more money in their homes than they have in their pension pot. Now these are just three of the key drivers for growth, and we’ll explore the client profiles in more detail shortly. However there are some factors that might prohibit growth. Factors inhibiting growth of the market Presenter: Such as? Jan Holt: Well a lack of understanding of the products available and how they work is holding back both clients and their intermediaries. Presenter: Why is this? Jan Holt: Well there are a number of retirees who simply haven’t heard of equity release. There are also those who want reassurance that equity release plans are regulated and that they would not lose their home. Intermediaries need to know how to recognise those who might have a need for equity release, and in addition both need to understand the risks associated and work out the best ways to structure the plan to mitigate those risks. Whether intermediaries choose to service this need directly by being qualified to write equity release, or whether they choose to refer cases to a suitably qualified adviser, the important thing is identification of the need and reassurance that there is a possible solution. Presenter: Well, thinking about reassuring clients when it comes to equity release, what can be done? Jan Holt: The Equity Release Council should provide peace of mind to potential clients. The Council’s an industry body and its aim is to increase social good by securing widespread recognition of the role that housing equity can play in retirement. The Council has incorporated the standards set by safe home income plans many years ago. It requires its members to adhere to a strict code of conduct designed to protect equity release customers. And if people are aware of the Council and the six point code of conduct, this should allay their fears. For many the fear of losing their home is uppermost in their minds when they think about equity release. Under the code of conduct the client has the right to remain in their property for the rest of their life. They can also move the plan to a new property. So if things change they’re not restricted by the fact that they took equity release, although this would be subject to the new property meeting the criteria of the provider. Providers who are Equity Release Council members will all have in place a no negative equity guarantee. This means that where plan conditions have been met the debt would never exceed the value of the property. Identifying clients suitable for equity release Presenter: So you’ve discussed the opportunity and some of the safeguards that are in place to protect consumers, but how should intermediaries go about spotting the clients for whom equity release might be suitable? Jan Holt: In a nutshell a potential equity release client is aged 55 or more, owns their own home and has a need to improve their financial situation; however we can drill down and look at some specific client segments. The Equity Release Council in its former guise of SHIP, or Safe Home Income Plans, has identified six main customer types who could use equity release as part of their financial planning. First those who need to fund long term care but do not qualify for state support; next those who have debt but insufficient capital or income to repay or service the debt; those who have low income and need some help in meeting the day to day costs of living; the newly retired who wish to maintain the standard of living they have into their retirement; and those already at or in retirement who want to upgrade their lifestyle in some way, be that a one off trip of a lifetime or significant home improvements. Finally there are those with more wealth who are looking at estate planning and the role that equity in their home might play, in particular how they can provide intergenerational support. Of course each client is unique with his or her own needs and objectives, but this segmentation gives us a feel for the common client profiles in the equity release market. Presenter: Now Just Retirement carried out some major research into equity release in 2012, what were the headline findings? Jan Holt: Our research findings in relation to these six types of clients have been very interesting. 67% resent the thought of having to sell their own home to pay for long term care costs, but 54% of people would need to do so to cover the costs. 10% of those surveyed said they still had a mortgage, and of these 15% had no plan about how they’re going to pay it off. When it comes to paying the bills, 33% said they’d be reliant on the state pension for their income. Importantly 61% of people wouldn’t sacrifice their own lifestyle to make sure they leave money to their family when they die, and this is very enlightening about people’s expectations and the way they think. It actually reveals that the way they think may be different from the way we have perceived it. There seems to be a strong wish for enjoying retirement, which is not surprising. Nearly half of respondents to the survey indicated that they believed they will enjoy their retirement and be able to spend their money, but will they have sufficient money to make this possible? There also seems to be a clear desire to help the family sooner rather than later in many cases. More than half would prefer to help family by giving them money whilst they’re still alive so that they can see them enjoying the benefit of it. The research reveals that it is important never to prejudge whether a client could benefit from an equity release plan. Presenter: And there are some statistics showing what those who use equity release spend their money on isn’t there? Jan Holt: Yes, let’s have a look at those now. When you look at how the money is used, it further reinforces the thinking that there may be a greater need for equity release for those who have recently retired and those coming up to retirement, mainly as a result in the squeeze on their income from low annuity rates and of course the effects of inflation that we’re now experiencing. Home improvements, holidays and helping family are three of the top reasons provided for purchasing an equity release plan. And the totals don’t add up to 100% because people tend to take money for a number of different reasons. Once they realise that they have access to funds they may choose to resolve several different issues all at once. In addition a plan with a drawdown facility provides them with access to funds in the future should a further need arise. The reasons for using equity release as shown on the chart here, we see equity release being used for maintaining or improving lifestyle in retirement, for example home improvements and holidays, and also as you might expect given the change in the economic climate since 2008, many clients are choosing to use equity release for debt repayment, living expenses and helping family members. Presenter: And what are the options for clients who want to use some of the equity in their home? Jan Holt: Well first it should be stressed that there are some options that clients should think about before they even look at an equity release plan. For example could they sell the property and trade down or move in with family or children, or even move into rented or local authority housing. What other assets are available that could be used first, and this includes money on deposit or indeed any other form of investment. Is there entitlement to grants and/or state benefits? This is something else that should always be checked. Are the family willing to step in and help financially? Could the client re-budget to live on less? And there is an option to take in tenants in order to increase income. Finally the client may be in a position to continue in employment in order to generate additional income. Lifetime mortgages Presenter: So assuming a client’s considered and rejected all of these options, what sort of equity release plan might be suitable? Jan Holt: Well the main options are a lifetime mortgage or a home reversion plan. There may be the possibility of being able to access conventional mortgage, and of course there are alternatives to equity release such as those we’ve discussed already. Possibly other types of borrowing may be available. Availability and attractiveness of each of these will of course depend on the client, their circumstances, their needs and objectives. Presenter: Okay, so two main options, lifetime mortgage or reversion, how do they work, talk us through them. Jan Holt: A lifetime mortgage is a loan secured against the value of a property, where the interest can either roll up and be added to the debt or paid monthly. As the name suggests, the mortgage is designed to run for the client’s lifetime. The loan and the interest if it’s been rolling up is repayable on the death or entry to permanent long term care of the last surviving plan holder, or when the property is sold for any other reason without the loan being ported to a new property. Presenter: As with all financial arrangements, there must be advantages and disadvantages, what are they? Jan Holt: In terms of advantages, for those familiar with mortgages, they find the lifetime mortgage relatively easy to understand. There are also clients who like the fact that even though the lender has a charge on the property they still retain ownership of it. The income can be taken either as a cash lump sum upfront or as a series of drawdowns. In addition it’s usually possible to transfer the loan from one property to another, subject to the new property being suitable security. Having a fixed or capped rate of interest means that the client knows what rate of interest is going to be paid or rolled up. And of course it might be possible to benefit from any future growth in the property’s value. There will also be a no negative equity guarantee, which means that the debt to be repaid will never exceed the property’s value. Presenter: And the potential drawbacks? Jan Holt: Well the effect of rolled up interest, particularly in a period of low or no property growth, will have an impact on the value of the estate. Clients have to understand that risk before entering into a lifetime mortgage. Should the client wish to make a voluntary early repayment then this might result in an early repayment charge being applied, and all lenders calculate this charge in a different way. So the client must be aware of this when the recommendation is made. The fixed rate of interest could be viewed as a disadvantage if rates generally were to decrease in the future. It should also be noted that for a client using a drawdown arrangement the interest rate that’s supplied when money is drawn down would be the rate prevailing at that time, not necessarily the rate at which the initial loan was taken. Also the circumstances in which availability of future drawdowns are guaranteed will differ from provider to provider. The use of equity release might result in the client becoming ineligible for means tested benefits, or might result in them losing some or all of their age allowance. This could either apply now or in the future, so it’s important to take this into account. And finally as I've already mentioned, there will be a reduction in the estate when equity release is used. Home reversion plans Presenter: And home reversion plans, how do they work? Jan Holt: With a home reversion plan all or part of the property is sold to a reversion provider. In return for this the reversion company releases a cash sum or a series of drawdowns. The sum released will be less than the property’s market value. The plan holder is granted the right to continue living in the property for the rest of their life. On death of the last surviving plan holder the property reverts to the reversion company. So the advantages of a home reversion are that the money can be taken as a cash lump sum or in a series of drawdowns, and typically the client will be able to raise more from home reversion than they can from a lifetime mortgage. There are of course no mortgage repayments or interest roll up as this isn’t a mortgage arrangement. The client has lifelong occupancy rights. It’s also possible to do a partial home reversion from the outset and then sell a further share of the property in the future if that’s required. And where the client uses a partial reversion and retains an interest in a proportion of the property then of course they will benefit from any appreciation of that proportion. Presenter: What are the potential downsides? Jan Holt: Because this is not a mortgage based transaction some clients are less familiar with how they work and don’t understand the concept as well. Furthermore for some transferring ownership of the property to a third party can be a difficult decision to make. Where no interest in the property is retained, so that is the client does a full reversion giving up 100% of the property’s value, then they will not benefit in any future property growth. Generally speaking once you’ve done a home reversion you can’t unravel it. As with lifetime mortgages a home reversion plan will result in a reduction in the estate value. Also should the plan holder die soon after having taken a reversion, then it may be have deemed to represent poor value. And finally as with lifetime mortgages, there might be an impact on means tested benefits or taxation for clients who use equity release. Addressing risks facing clients Presenter: You’ve touched on some of the risks at the product level, but what are the risks that the client faces, or thinks that they face when it comes to looking at equity release plans? Jan Holt: The key risks are outlined here on the slide. Some of them can be mitigated through a robust advice process and selecting the most appropriate solution for the client. First there’s a real risk of the client losing some or all of the remaining equity in their home, particularly if they use a lifetime mortgage. Some of the ways of helping to minimise that risk are to use a plan which has an option to buy an element of protected equity, pay some or all of the interest off, take the money needed in a series of drawdowns, so that the interest only starts to roll up from the point that each trench of money is released, or use a partial home reversion plan in order to effectively ring fence a percentage of the remaining equity. We’ve already talked about the need to ensure that clients check the impact of equity release on any means tested benefits, grants or their tax allowance. Most providers will allow loans to be transferred from one property to another, but that is subject to the new property meeting lending criteria, and some providers place restrictions on certain types of property, for example retirement housing. This should be checked carefully if the client plans to move, or believes that they may move at some future point. A real fear for many is that they’ll be asked to leave their home, and being able to remain in the property for life is of course a key element of the Equity Release Council’s code of conduct. So this really is more of a perceived risk than a real one. For clients who release equity with a plan to use that to support their financial plans through retirement, there’s a risk that without a disciplined approach they might spend it too soon, and then have no resources to fall back on. Finally there is a worry that the solution they end up with doesn’t fully meet their needs, and this is where the need for good advice which takes into account all of the client’s circumstances, their needs and their objectives both today and in the future becomes absolutely paramount. The fact find and advice process for equity release Presenter: So what are some of the things that intermediaries need to consider in their advice process? Jan Holt: It starts with a thorough fact find. This will be the key to being able to research and find the most appropriate solutions. As with any fact find, there is some basic information to be collected which also helps determine eligibility. Some providers are offering different terms to those whose life expectancy will be shortened by a medical condition, so collecting this sort of information is important. Also understanding the family situation and the client’s plans and preferences for their estate is essential. Intermediaries should also establish what wills and lasting power of attorney have been put in place. They need to be prepared for advising older clients, and the chance of developing dementia for example increases with age, so it’s good practice to ensure that paperwork such as lasting power of attorney is in place to protect clients should their mental capacity reduce. Understanding income and whether the need for income is likely to change in the future is important. Similarly knowing how outgoings might change during retirement will have a bearing on the overall solutions discussed. We’ve already looked at considering use of other assets before using home equity, so knowing what these are and what might be utilised is critical. Finally intermediaries need to know what the client’s liabilities are. Is there secured debt or unsecured debt and are there credit cards? What rate of interest are they paying on these? What’s the monthly level of repayment and is that sustainable? There are many people entering into retirement that haven’t cleared their mortgage debt. They may not have put a repayment vehicle in place, so now that they’re coming into retirement is it possible to take a new mortgage term? Clients who are due to repay an interest only mortgage in the next couple of years may have already had letters warning them of the repayment. How many of these are approaching their retirement and could have a real need for equity release? However it is important to ensure that the amount that can be raised through equity release is sufficient to pay off any existing debt secured against the property. Clients will need to instruct a solicitor, asking for solicitor details ensures the smooth running of the process should your client decide to proceed. It may also be worthwhile considering that the client’s solicitor is comfortable dealing with equity release. If the interest is not being serviced then credit history won’t be used to determine how much the clients can borrow as it would be with a conventional mortgage. However clients do still need to disclose any credit history, and not including these details could lead to a case being refused due to non-disclosure. Then we move on to some more specific information about the need for equity release. So what is the purpose of the loan? How much is the client able to borrow and what is their target amount? Is there a timescale attached to when they need the money? For example is it for a wedding or school fees and is needed by a certain date. It’s a good idea to involve the family in the decision making process, to ensure that they’re aware of the situation and that they understand how equity release works. As a result they may decide to help out themselves instead, or at least they’ll understand the impact on any potential inheritance. Of course this also helps to build a relationship with the family, and they could be your future clients. To ensure that your recommendation is complete, you must have discussed all of the alternatives to equity release, and we’ve already looked at those earlier in this film. It will also be necessary to discuss and document the client’s views and priorities. Some aspects to consider are what are their views with regard to property ownership? Do they expect or want to be able to leave the property as an inheritance for their beneficiaries? Do they have an up to date valuation of the property and is this realistic? What level of house price inflation have they experienced and what are their views about this for the future? In relation to inheritance and estate planning, do they want to leave an inheritance and if so how much? What is the current value of the estate? And do family members have a need for the money sooner rather than later? So if taken now could this reduce the estate for inheritance tax purposes? Interest rates and rolled up interest: it’s really important to demonstrate how the loan increases over time when the interest is rolled up. The set up costs must be explained. What will need to be paid for before and after the loan is set up, for example valuation fees or administration costs. Can they be added to the loan, or are there any special deals available to negate some of those costs? Will there be any ongoing costs, for example to access a drawdown facility, and what other costs are likely to be associated with setting up an equity release plan, so the solicitor’s fees or an advice fee, and which fees are non-refundable if the process begins but does not complete? Do they anticipate a need for money in the future, and would they be reliant on house price increases to free up those further funds, or will they take a smaller initial advance to leave a facility to be drawn down on as and when it’s needed? Are clients aware today how many of the following future events could happen and what impact they could have on their equity release plan? Do they have existing medical conditions which may indicate a need for long term care? And if this is a possibility would they prefer that care to be provided in their own home? In terms of relationships, would they move home or remarry following either divorce or death of a partner? What’s the potential impact of these situations occurring, and what are the implications for any equity release plan that’s in place? However uncomfortable it’s practical to discuss these issues, and have clients’ responses documented. If clients have discounted moving for the time being, do they envisage a time when they would want to move to either downsize or be closer to relatives? And if they’re considering this do they have any timescale in mind? If your clients are expecting to be in a position to repay the loan early do they understand the circumstances in which any potential exit chart would or would not become payable? Is an early repayment expected either through inheriting money from parents or from family, or from funds being released from a pension or another investment? The regulator’s stance on equity release Presenter: Well that was a comprehensive look at fact finding, but what does the regulator say about equity release? Jan Holt: The Mortgage Conduct of Business, or MCOB, sets out the requirements that advisers will need to fulfil to ensure that their process for determining suitability is compliant. To find this information intermediaries can go to www.fca.org.uk, and if you click on the FCA handbook then business standards that takes them to the mortgage and home finance conduct of business source book. Section 8 is the most relevant, although sections 7 and 9 are also applicable. Now we’ve looked at most of these requirements when we discussed the fact finding process. In addition any specific requirements that can only be met by certain products is a consideration once these have been identified in the fact find. And once identified the intermediary can go on to research what’s available on the market. There are other considerations that we’ve also touched on. Assessment must be made of your client’s entitlement to means tested state benefits. It’s very important to ensure that you’re assessing the potential impact of equity release on future entitlement as well as looking at what they’re currently entitled to, and that your clients are aware of the implications. Now the MCOB rules don’t say that if there is an impact the client shouldn’t use equity release; however they do require any benefits of equity release to outweigh any potential adverse impact on the benefit. There is also reference in the rules to affordability of payments for those choosing to service the debt. Here are the main benefits that can potentially be affected by equity release. Research tools for advisers Presenter: What about research in the market? Jan Holt: Intermediaries do of course have to evidence that they’re doing their research and they have to keep appropriate records. There’s a wide variation in both interest rates and product features on the market, so fitting a product to a specific client need may be as appropriate as finding the cheapest interest rate. There may be a need for flexibility in terms of lending criteria or a product feature which is specifically important to the client. That means that alongside interest rates intermediaries need to ensure that they’re comparing product features. For example if a client has a need for a drawdown facility, the amount and accessibility of that facility may outweigh an increase in the interest rate. There’s a need to keep up to date with product changes in this marketplace, especially in a period of market growth where we may well see new entrants or product innovation. Presenter: And what resources are available to advisers who want to be more active in the equity release space? Jan Holt: There is a lot to consider but also a lot of support available. So there are plenty of places to look for help with benchmarking the advice process, and the fact find. For example the Council of Mortgage Lenders has issued a best practice checklist. The Equity Release Council website also has a checklist and the Regulator publishes guidance on what needs to be included as we’ve seen earlier. DWP will be a good source of information relating to means tested benefits. And there are software solutions that enable intermediaries to assess their client’s entitlement to benefits and the impact that equity release may have on them. And finally many equity release providers have tools and material available to assist in ensuring that the process is robust and compliant, as well as helping to explain things clearly to clients. They also have a range of marketing guides and templates to support the communications process. Presenter: So for intermediaries who’ve concluded that they need to be more engaged with equity release, what are the things that they need to be thinking about? Jan Holt: The first question to ask yourself is do you have the appropriate qualifications and permissions? And if yes then do you see equity release as a business priority? If you do then it’s imperative that you brush up on the current range of solutions available and seek support from the providers who offer them. This will include not only technical support on product but also support for business development. Now, if you don’t believe that you’re likely to be proactively advising on equity release, then there is an option to refer clients to somebody else who’s active in the market, and keeps themselves up to date on products and requirements. For those who aren’t qualified to write equity release, then there’s either a learning opportunity or again the option to refer clients to a suitable qualified and experience adviser. Whichever option intermediaries choose, the good news is that they can extend an equity release service to all clients regardless of whether they are personally qualified. This I feel proactively manages the relationship with the client, which is important when we’re looking at client retention. Presenter: And for those advising clients on equity release, how do they get remunerated? Jan Holt: There’ll be a range of procuration fees or commission paid by the lenders. Therefore advisers will need to think about what their overall profit point is for dealing with equity release, and how far the proc fee or commission meets it. If there’s a shortfall then there may be a need to charge an additional fee for equity release advice. The fee charged is entirely up to the intermediary. Some things to consider are whether it should be a fixed amount, provided of course that covers their costs. And if a case were complicated would it make sense to charge by the hour? Should there be an upfront fee for the report, bearing in mind that sometimes the recommendation may be to do nothing. Some intermediaries charge a percentage of the amount drawn down, but this might not be profitable for the smaller equity release cases. Any charge must be explained to the client at the first meeting and covered by the IDD document. It is our intention that the information contained within this presentation is accurate. We have taken all reasonable steps to ensure that it is up-to-date and where relevant, reflects the current views of our experts. However, we do not accept any liability for errors or omissions in the information supplied and if you require clarification on anything, our recommendation is that you contact us at the address below for verification. Our Registered Address Just Retirement Limited Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey RH2 7RU. Regulatory Information Just Retirement Limited. Registered Office: Vale House, Roebuck Close, Bancroft Road, Reigate Surrey, RH2 7RU. Registered in England Number 05017193. Just Retirement Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Presenter: In order to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. Now after watching this film you will be able to describe the equity release market and its potential, identify the clients who might wish to consider using equity in their homes to improve their financial position, distinguish between the two main equity release mechanisms and explain the alternative options available, outline the key facts that must be understood in the advice process, and finally understand financial intermediaries’ options for accessing the equity release market. Please now complete the reflective statement to validate your CPD.