December 2007

Reversion revolution?

April this year saw home reversions granted regulatory status - a successful outcome following three years of campaigning to create a level playing field with the lifetime mortgage. It might seem curious for an industry to be active in seeking regulation for its products but the alternative would have been worse. In a market providing two alternative financial solutions, to leave one product unregulated and the other regulated would have resulted in an imbalance leaving the adviser and the customer at risk.

Since April advisers have shown increased confidence in recommending home reversion plans for their clients. In anticipation of regulation we had seen signs of new life in the reversion sector. There have been as many new reversion providers as lifetime mortgage providers entering the market over the last two years, including both household names and specialist firms. Greater competition has improved the rates offered to customers. There has also been some product innovation in the home reversion market recently in the form of flexible product options and impaired life offerings.

These developments have increased awareness of home reversion products; this is starting to be reflected in business volumes. The latest quarterly SHIP figures (to 30 September) show home reversion sales up by 20% year, on the equivalent quarter last year. The last quarter's sales of £21.9m are still a long way short of reversion sales in their heyday at the end of the nineties when they formed the majority of equity release sales and exceeded £200m per year.

Growing business

At this point it is worth exploring the circumstances that might further improve business volumes of home reversion plans. This will probably come from an external factor, the most likely being house price inflation. With interest rates much higher than they have been for four or five years, the Council of Mortgage Lenders has predicted a period of stagnation, with prices rising by no more than 1%, taking account of inflation. In real terms we could experience falling house prices for the first time in over a decade.

Under this scenario there would be a much-improved backdrop for home reversion plans as opposed to lifetime mortgages for the following reasons:

- Interest on lifetime mortgages will roll up more quickly than increases in house prices and consequently reduce the amount of equity remaining in the property when sold.

- Added pressure will be placed upon lifetime mortgage providers to review their loan-to-value ratios due to the impact of lower house price growth on their no negative equity guarantees.

- With a home reversion plan, clients know from the outset the percentage level of retained interest in their home. This will never change, irrespective of what happens to future house prices. Retained equity is secure.

- Homeowners may be encouraged to take out a home reversion plan sooner rather than later in order to maximise the sum they can raise.

Consider the options

With the outlook for house price inflation now looking far less certain, it is crucial for advisers to consider home reversion plans as an alternative for meeting their clients' equity release needs. There are many factors to consider when assessing the product that best suits a client.

The stark conclusion is that in a housing market where there is a possibility there might be little to no growth in house prices over the next few years, home reversions are a more attractive and serious proposition than they have been for many years. From a client's perspective, they can continue to live in the property rent free for the rest of their lives and have less cause to worry about future house prices or whether there'll be any equity remaining to pass on to beneficiaries.

In times of uncertainty people always revert to their comfort zones. Lifetime mortgages may have grown in popularity in recent years but they have prospered only in a period of strong growth in property values; they may be less resilient in a more uncertain economic environment, with advisers having to think seriously before recommending that their client gear up on their largest asset (as a result of taking out a lifetime mortgage), as opposed to rebalancing their wealth through a home reversion plan. If nothing else it makes the equity release market an even more exciting place to be in 2008.

Simon Little
Business Development Director
Home & Capital