August 2007

Equity Release - Lifetime is for living

How do lifetime mortgages work?

A lifetime mortgage is a way that clients can borrow a set amount of money against the value of their home, in the form of a long-term loan. It allows them to unlock some of the value without having to move. They would continue to own the home for the duration of the plan, which also allows them to draw more money as and when they need it. There are not normally any repayments as the interest is rolled up and not paid until either death or the need for long term care, when the property is then sold (last survivor).

What role can lifetime mortgages play in retirement planning?

Today's lifetime mortgage products put the customer in control, providing them with more flexibility, allowing them to draw lump sums as and when they need it. This flexibility means that advisers can discuss income needs with their clients (in retirement) as and when the need arises, unlike traditional pension planning where the retirement income decision is made at the time of retirement. As this is all linked to the customer's property, they are in a position to be able to watch the impact of property value increases and react accordingly.

What do they offer that other products cannot?

Flexibility and control are the main aspects here, as customers can decide (within certain parameters) how much and when they release funds from the value of their home. What is key is that advisers recognise that not all products are flexible, as some providers impose time restrictions of five to ten years from the outset of the loan for taking subsequent drawdowns. Many alternative income products are set at the time of the plan with little or no flexibility.

Lifetime mortgage products are linked to the value of a customer's home and the amounts that they can release are based on their age in terms of a loan to value calculation, so as they get older and if their property increases in value, the amount they can release will increase.

Advisers should look for a provider that offers a truly open-ended drawdown facility, such as:

- Withdraw money at any time during their retirement. This is particularly important as needs change. For example, it may be 20 years or so before further funds are needed to help with costs. Here it's critical that the facility remains available and, even more importantly, the provider will still be around to provide the loan.

- Borrow up to 35% (Prudential's plan) of the value of the property over the course of the lifetime.

- Customers can continue to drawdown funds regardless of what happens to the property value as it is fixed at outset.

How have they evolved to meet customers' needs?

The products of the past tended to be very inflexible, and were in the main a one decision product. The flexibility and choice of how customers use these new products to match their income needs in retirement now means that they can evolve with your retirement income needs. They are even flexible enough to allow clients to move home and retain the lifetime mortgage, or even use the lifetime mortgage to trade up to a more expensive property.

Who are the target customers?

There are many types of potential customer. While those just needing a lump sum for home renovation, new car, property abroad or to give to the children are still catered for, those needing flexibility in terms of a regular income as a part of their retirement planning now have a choice. There are also a growing number of customers who are using them with inheritance tax planning solutions too.

Do you think there is a growing understanding among customers of the benefits of these products?

Most definitely, in fact a recent study by Datamonitor showed an estimated 12.9million people expect to use the equity in their property to supplement their retirement income. Lifetime mortgages are no longer a last resort option but a true retirement planning opportunity for all. The understanding from customers is growing across all target groups too with high net worth clients using these products to fund education and for inheritance tax planning purposes, as well as the average customers who use them for income and lump sum generation.

How can you see the market developing?

Product innovation has been crucial in taking the equity release market to another level and we believe that this will continue to be a driving force over the coming years. Providers have stepped away from 'me too' products and are looking to differentiate their products in regards to more flexibility and control for the customer.

Flexible drawdown products allowing clients to minimise interest roll-up over the period of the loan have grown this year, with over 50% of specialist advised cases going through this route. Product flexibility will continue into next year, as many providers focus on flexibility to give customers a choice about when they they draw down their money.

Paul Carter
Head of Business Development - Lifetime Mortgages
Prudential