Martin Lewis, founder of website Moneysavingexpert, turned his attention back to equity release in a new segment called ‘do it/don’t do it’ on a recent episode of This Morning.
Lewis proved once more why he has crafted the successful career that he has, but his review of our industry was lacking the candour that has become a staple of his analysis.
What’s more, I do not believe that this was simply an oversight on his part, but rather a calculated decision to maintain his position as the people’s champ.
Now, I’m not saying that Lewis isn’t good at what he does, he is. However, when you’re analysing an often complex, ever-changing marketplace whose effectiveness alters from case-to-case, it is rather pointless to restrict oneself to a five-minute timeframe.
In his new segment, Lewis played the role of judge, jury and executioner in relation to a series of financial queries from viewers.
On the chopping block
Equity release was the first to face the chop and Lewis, to his credit, was fairly even-handed and pointed to most of the key points:
- The importance of independent professional advice
- Equity Release Council approved products
- The usefulness of the drawdown option
- Considering options like downsizing
However, what Lewis did not mention was the impact house price inflation can have on the value of equity release, and his use of exaggerated interest rates further exacerbates the issue.
I think it unlikely that Lewis, the slick operator that he is, simply forgot to mention the possible impact of future house price inflation.
No, Lewis knows that starting discussions about future house price inflation are 1) too lengthy to fit within the parameters of This Morning’s tight schedule (Amanda Holden was reviewing Plato’s Republic in the next segment*) and 2) somewhat involved and not an exact science.
So, to bypass this cul-de-sac, Lewis decides to skim over the issue of house price inflation entirely. You could argue that Lewis has therefore abdicated his responsibility as champion of all consumers to give the people the balanced review they deserve, but let’s not dethrone him just yet (God knows who or what would replace him!).
You could argue that Lewis has therefore abdicated his responsibility as champion of all consumers to give the people the balanced review they deserve, but let’s not dethrone him just yet (God knows who or what would replace him!).
Instead, we can just fill in the gaps and make sure the consumers get the balanced review they deserve.
Unfortunately, we weren’t made aware of the caller’s house price, but let’s estimate that it was around £200,000 – average equity release customers own a property worth more than £250,000.
Lewis states that ‘if you did equity release for £20,000 and lived another 25 years, you’d probably lose £100,000 off your property when you died.’
This figure is, of course, dependent on the interest rate that the caller secured (Lewis’ estimation is based on an interest rate of around 6.7%).
But I think the consummate consumer champion has perhaps not ran his rule over the equity release industry for some time as his figures are somewhat inflated and outdated. In fact, according to a news article on Lewis’ own website, his ‘£20,000 rising to £100,000’ soundbite may even be five-years-old – a lifetime in the equity release industry!
If the caller was to talk to an adviser and get the personalised illustration that Lewis suggests is indeed a good idea, they may be able to secure an interest rate closer to 5.2%.
A 1.5% swing in the rate makes a sizable difference in the amount of interest accrued: an interest rate of 5.2% would result in a total of approximately £70,000 owed after 25 years or a £30,000 difference in comparison to Lewis’ assumption.
It’s obvious then that Lewis is still using old figures and therefore not giving the caller, the viewers at home and poor Schofield and Holden the clearest picture.
What’s more, when you couple this oversight with his omission of any discussions regarding house price inflation, the picture becomes blurrier still.
Let’s say that the caller’s house appreciated in value at 1% per annum over the next 25 years – despite house price inflation approaching 10% in the past year and having never fallen below 5% per annum over long-run averages since the 1980s – what impact would this have?
Well, after 25 years the caller’s home would be worth just over £255,000. If we are to accept that the caller would have been able to access the lower rate of 5.2% – they only wanted a 10% LTV after all – then the amount owed would be, as I have mentioned, approximately £70,000.
This means that after 25 years of roll-up interest the caller would still have around £185,000 of equity.
They would, therefore, see their equity increase over the life of the policy! And this does not take into account the benefits the tax-free cash release would bring to the customer, or the impact inflation would have on the true value of the estimated £70,000 owed.
When we paint a clearer picture, equity release does not look like the ‘incredibly expensive’ product that Lewis describes.
Perhaps now that the equity release industry is becoming more mainstream and interest rates are crashing to record lows, now would be a good time for Martin Lewis to get his calculator out, crunch the numbers, and re-evaluate his position on this exciting and evolving product.
Andrea Rozario is chief corporate officer at Bower Retirement Services
*I switched over