Article | January 2008 | by Duncan Young
Defining equity release
Defining equity release can be difficult as sell-to-rent schemes have shown. Equity release providers have been quick to say that the payment of rent under an assured shorthold tenancy when compared to no rent under a lifetime tenancy with home reversion schemes is simply not equity release. SHIP members are keen to commend the fact that neither Bank of Scotland nor Barclays Bank were members of the trade organisation when the sale of shared appreciation mortgages took place. Yet both these schemes did provide finance for the elderly.
So to extend the argument a little. If there are products that some would not consider equity release, are there SHIP equity release products for the not so elderly? And should these products be classified as equity release? Some lifetime mortgage providers make their product available from the age of 55 – 10 years before the current age of retirement and when the life expectancy of a single woman is approaching another 35 years. This development, which gathered speed in the second half of 2007, was a response by certain product providers to a perceived need. It was probably helped along its way by the sub prime mortgage crisis and the Northern Rock debacle.
So 55 year olds are now being sold lifetime mortgages. Undoubtedly brokers will be assessing suitability before making a recommendation. But the products themselves have a future impact that many other products do not have. Interest is not payable, but instead it accrues. That means with current interest rate levels debt doubles roughly every 10 years or so. See the graph which is based on a 55 year old borrowing £40,000 at an interest rate which accrues at 6.49%. With a 2% house price inflation assumption negative equity is reached at 93 years of age.
Also note that the products can have high redemption charges for many years – not early redemption charges for a few years. These and other facets make will make future life choices difficult for the customer.
Alongside its well-known Property Plan, Retirement Plus manages a mature book of traditional home reversions many of which were originated in the 1980s and so many of those customers will now be in their 90s. Many are amongst the old and vulnerable segment of society. What though is quite commonplace is that their housing needs are changing significantly as they get older. The needs vary. Some may have the need to move to sheltered accommodation with a warden on site where are others may need to install a chair lift and wheel chair ramps. And both a move or an investment in the property requires money but as the margin between asset value and debt narrows where is it going to come from?
A portfolio of customers originated from 55 years old will be very different from the one managed by us here at Retirement Plus, where the average age at the start was 73 years old, as it will take customers through retirement into an active old age before the twilight years, often in specially adapted accommodation. It is safe to presume that this portfolio will have number of life events such as divorce, re-marriage and the need to move. A typical customer might want to move at 65 on retirement. Then, when they reach their 80s they might want to move into sheltered accommodation. So many will want to move two or three times during the life of their equity release product. Yet all this time debt will be doubling every 10 years. It is not a matter of whether negative equity has been reached but a lack of home equity to justify a refinance by the lifetime mortgage provider on the terms required by the customer to achieve their life style goals.
And yet it is impractical for the product provider or broker not to satisfy customer needs. If today, the advice is a lifetime mortgage then so be it. Perhaps though there is a case for the products not to be sold as “equity release” and for the products also not to be aligned with the SHIP boat of comfort. These products are not for the retired but for the economically active. In the jargon it may be mortgage equity withdrawal rather than equity release.
The FSA could insist upon different wording in the KFI to explain the consequences of taking out a mortgage with interest accruing – this would not be the normal MCob requirement, but one which asked customers to focus on their housing needs over a long period of time. Thus it could call upon brokers to review and explain the impact that debt accrual may have and not simply rely on the fact that SHIP accredited products have to permit portability. I am therefore looking for something stronger than 9.4.145 (2) “Risks” section of a Lifetime Mortgage KFI.