April 2008

Removing all barriers

The role of the adviser in the process of advising someone on equity release is often one of educator to the client and sometimes to the rest of their family too. While all parties in the transaction may recognise that it is entirely rational to release equity from the home to improve quality of life, the psychological barrier to using the equity built up over many years can be considerable.

Releasing equity in itself is not that complicated. Recent innovations in the market have meant products generally serve consumers well. Any complication arises in making sure the alternatives have been properly explored.

What are the alternatives?

Real Hardship - it is important to identify quickly if a client has approached the adviser as a result of real hardship. In this case they need to be pointed in the direction of the right agency to ensure they are receiving all their entitled benefits. If a client is not receiving everything they are entitled to, then releasing equity could simply serve to remove their entitlement, which is clearly not an ideal outcome.

Home Improvements - if someone expresses interest in equity release for home improvements it could be worth checking what condition the property is in. A property in poor condition is likely to lead to a depressed valuation and will affect the amount the client can release.

Trading Down - while the FSA does not specifically require an adviser to explore trading down with a client it is hard to argue against it. Unfortunately this is not an acceptable way forward for those for whom happiness in retirement is intrinsically linked to the home they love.

Having established if the client's needs cannot be met from the alternatives it is worth exploring the various forms of equity release. If the customer needs to maximise the lump sum released, a home reversion scheme could be the way forward. The most recent to be regulated, these schemes offer a lump sum or regular income ('lifetime lease') in return for the purchase of part or all of the equity in the property. The client retains the right to live in their home until death or going into long term care.

If the client needs access to a smaller amount now, with the potential to access more in the future, a lifetime mortgage drawdown scheme could be ideal. This is simply a mortgage with no interest payments. The interest rolls up to be repaid with the outstanding loan on death or entry to long term care. The advantage of this, the most recent innovation in the market, is that the client can release just what they need when they need it which can substantially reduce the interest that ultimately has to be paid.

Get the right information

Before giving advice it is vitally important that the client understands how critical it is to inform the adviser about all their income sources and expenditure. There are excellent packages available which can make it relatively straightforward to assess the interaction between equity released and any benefits your client may be entitled to, but, as with any software, the output is only as good as the input.

All schemes come with terms and conditions, so on entering an equity release arrangement make sure the client understands what options are available if they wish to move house, their responsibility for maintaining the property in good order, the right of the lender/reversion provider to inspect the property, and that permission may also need to be sought before someone else moves into the property. Consumers should also understand the impact on things such as remarrying, - for example, if the spouse is younger then it may not be possible to add them to the arrangement, potentially exposing them to the prospect of their home being sold on death or on the entry into long term care of their partner.

Our grandparents' generation would have been loath to use 'the children's nest egg' to improve their standard of living during retirement. However, attitudes are changing with people now approaching retirement determined to enjoy the time they have, perhaps with the emphasis on making the most of the early years of retirement while in good health. With increasing longevity, many may actually have already given money to help children and grandchildren, for example onto the housing ladder, and perhaps should now consider their own enjoyment. Equity release may well be the right way forward for many of these people.

Vanessa Owen
Head of Equity Release
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