Equity release up 10%

Safe Home Income Plans (SHIP) has reported a 10% rise in equity release in Q3 2008 over Q2 2008. There could be many reasons for this but with house prices falling fast and expected to continue on their journey south it may be that people are bringing forward their existing plans to release equity.  Those who have their pension invested in volatile assets that are suffering a downturn at the moment may also be turning to equity release to shore up the gap.  It certainly beats crystallising losses on the stock market.

Poll: equity release to fund a holiday – right or wrong?

I’ve just read a report from an equity release provider that surprised me.  It has a breakdown of what people use equity release for – the results show that the second most popular use is to fund a holiday.  Of course people have multiple uses for the money they release from their homes so it’s not quite as outrageous as it seems but still, 34% of people is a lot. We are talking about mortgaging your home after all.

I’ve written previously that I think it’s an irresponsible tactic to use holidays in marketing but I’m now having to challenge this. Given that so many people do use equity release to fund a holiday, isn’t it justifiable for equity release providers to use it in their marketing?  On the other hand… I heard a while back that people use haemorrhoid cream to reduce the appearance of wrinkles around their eyes but, oddly enough, I don’t recall Preparation H advertising this use!   

9% of over 55s would consider equity release

New research from Newcastle Building Society show that only 9% of the UK’s over 55s would consider equity release.  Around a third of people surveyed are going to be dependant upon the state pension and have not considered equity release.

Equity release does still have a rather poor reputation but if you have no other means to fund retirement why on earth would you not do it?  I can fully understand only considering it as a last resort but to refuse to use your only remaining asset to fund your retirement is, in my opinion, being overly cautious.

I’ve spent many many hours investigating various equity release issues, bad press and case studies and I do believe that there is nothing to fear if you have a good, honest financial adviser to help you.  The original scandals were the result of poor products and poor advice.  The industry has addressed the poor products so your right to continue living in your own home is protected and interest rates continue to improve.  And now that the FSA regulates equity release you should be protected from poor advice too.

For those surviving on a state pension I think it’s time to consider equity release and an improved lifestyle.

Relief from expensive equity release plans

There is some good news for those who have already done equity release – rates are coming down and they may be able to remortgage to a better one.  A financial adviser friend of mine recently remortgaged a client away from their 7.85% equity release plan to one with a rate of 6.10%.  Just like other mortgages, redemption penalties need to be taken into account.  Some plans don’t have redemption penalties at all (although this is rare), some have them for just the first 5 years and some have them for the life of the plan.

Equity release redemption penalties can be complicated to work out – in fact some are actually based on gilts pricing so the redemption amount can go up or down from month to month.  One provider recently took over 20 minutes to explain the redemption penalty calculations to my financial adviser friend – not because he took a long time to understand it but because that’s how long it takes to describe it!  Laughable but also rather strange as it’s not necessarily a punitive redemption penalty – it’s just complex.  Just as well you can’t do equity release without a qualified financial adviser!

Anyway, this isn’t meant to be another negative post – rates have really improved and that’s a good thing for new and existing equity release customers.

Blunkett promotes equity release

Blunkett told the annual Counsel and Care lecture that elderly people should use equity release to help fund their long term care.

Through equity release programmes, a proportion of assets could alleviate the need to sell up or to enter residential care by offering the cash needed to sustain the existing lifestyle.  There is a total of £700 billion tied up in home ownership by those in retirement.

David Blunkett MP, Counsel and Care’s Graham Lecture 04.09.08

I’ve talked about this issue before – and I agree with Mr Blunkett – there is no way we can expect to fund everybody’s retirement years.  Nor should we when there are many who can afford to do so themselves through equity release.  Mr Blunkett goes on:

Just to meet population growth alone, the most pessimistic estimate of the cost of social care predicts an expected rise in spending from £10.1bn in 2002 to £24bn by 2026 – a rise of almost half a percentage point of GDP.  This is totally unrealistic – an impossible dream – and fails to acknowledge that this generation are substantially healthier and better equipped to manage their own care with the help of family and friends rather than a reliance on the state.

And just to put the final nail in the coffin for our dear old nanny state, Blunkett tells us to work until we drop:

That all of us, every one of us who is capable of doing so, should aspire to continue with some meaningful activity to the point of our incapacity overtaking us.

Can’t we have just a few years of leisure?! Please?  Equity release just has to play a part in enjoying retirement now.  With so little proper financial planning done by most people during our working lives  (we’re too poor to afford proper financial advice) the majority have no viable alternative.

UK pensioners sitting on £762bn despite property crash

The Prudential’s Equity Release Index recently found that homeowners aged 65 or over have £726bn of equity in their homes.  Of course as house prices continue to fall this figure is decreasing.  I wonder if there’s any connection between this fact and the recent increase in equity release business in the UK?

SHIP (Safe Home Income Plans) – the trade body that represents more than 90% of the equity release market in the UK – announced on 16 July this year that equity release business volumes produced by its members in the second quarter of this year had increased by 14% over volumes in quarter one. A total of £275.7 million of equity was released by SHIP members in the second quarter, 14% higher than the £242.7 million released in the first quarter.

So how far will house prices fall?  Nobody knows but estimates from those who dare to forecast seem to range from around 30-70%.  I wouldn’t be surprised by 50%.  Rental yields are a good way to value property and they are incredibly low.  In order for yields to recover we need either (or both) prices to fall and rents to increase massively.  I don’t think rents are coming up any time soon since: (a) many people have sold  recently and opted to rent while the market is suffering so there is no shortage of rental property; and (b) the economy as a whole is suffering thus reducing available cash in renters’ pockets.  Therefore prices must fall further and there’s certainly plenty of evidence for this.  Today the bank of England announced that the number of new mortgages approved for home buyers fell in July to just 33,000 – down by 71% on a year ago.

More to the point for those who already own property, how long will it last?  When property crashed at the end of the 80s bubble the market took 5 years to hit the bottom and another 5 for prices to recover to pre-crash levels.  But it could be worse – Mr Darling told a newspaper at the weekend that Britain was facing its worst economic crisis for 60 years.  Maybe he’s just lowering our expectations so we’re not disappointed by his performance later.

Predatory equity release practices in the US

Last time on equity release I came to the double conclusion that (a) equity release is expensive so people think its unfair and (b) most of the issues around equity release actually arise from mis-selling practices rather than the product itself.

Today I can’t resist a peek at what’s going on in the US. Not ten years ago either but current practices.

Investor warning issued

In March this year the Financial Industry Regulatory Authority (FINRA) – they describe themselves as the largest non-governmental regulator for all securities firms doing business in the United States – issued an investor warning regarding Reverse Mortgages (US term for equity release).

FINRA says:

Holiday today, poverty tomorrow!

“Reverse mortgages were originally designed as a tool for allowing ageing, low-income homeowners to keep their homes by providing a source of additional monthly income to meet expenses. Now, as lenders are realizing that more and more Americans are retiring and sitting on large pools of home equity, they are beginning to aggressively market reverse mortgages to younger retirees as a way to finance a more extravagant retirement lifestyle than they could otherwise afford. The trouble is, those same homeowners may need their home equity some day for something far more pressing than a vacation, only to find that it has already been spent.”

In the US the minimum age for equity release is usually 62 with some lenders starting at 60. In the UK some start as low as 55 years. And in my last post on this topic we saw Norwich Union advertising equity release as a way to fund a holiday. It’s at times like this that I’m embarrassed to be in marketing. Who sat down one day and said “I know, we’ll encourage old people to fritter away their only real asset!”? Did nobody stop to think how they would feel if somebody did that to their grandparents? By the way, I have nothing against retired people enjoying life. I do have a problem with marketing an expensive last-resort product to people as a casual purchase to fund something frivolous like a holiday.

Forget the holiday, this is a purse snatch

“Be sceptical of Reverse Mortgages as Part of an Investment Strategy,” says FINRA. “If someone urges you to obtain a reverse mortgage to make an investment or purchase an insurance product or a security, such as a deferred annuity, be very sceptical, particularly if they are promising high returns. In essence, they are encouraging you to speculate with your home equity, which you may need for more critical purposes down the road.”

Oh dear, it gets worse. Now we’ve gone beyond advertising equity release for a dream holiday. Now we’re telling people to release their equity in order to buy another (high risk) product that locks away their money so they can’t access it if they need it in a hurry. This predatory practice is known as equity stripping.

Excerpt from a press release, 13 Dec 2007:

“Senate’s concern was raised by lawsuits against Financial Freedom filed in San Diego, California. Such as the one filed on behalf of Ernestine Boach who was allegedly conned into purchasing a reverse mortgage with exceptionally high fees and then sold several insurance and annuity products with the proceeds. The case, Ernestine Boach v. Financial Freedom Senior Funding Corporation was filed in San Diego Superior Court on January 11, 2007 and alleges that the Boach was advised to take out a reverse mortgage from Defendant Financial Freedom Senior Funding Corporation for $171,000 on the home she owned. The proceeds of which were to be used to purchase insurance products, including, a Fidelity and Guaranty deferred annuity with enormous surrender charges for $80,000, and a $44,350 immediate annuity to fund payments on a $250,000 flexible premium life insurance policy (also containing surrender charges).”

An isolated incident? A survey released last year by AARP, formerly known as the American Association of Retired Persons, of more than 1,500 reverse mortgage borrowers found that almost one in 10 were urged to buy other financial products, like annuities.

So it seems all is not well in the world of American equity release. Next time, some investigation a little closer to home.

Equity release – rip-off or reformed character?

Equity release earned itself a well deserved reputation as a dangerous rip-off product in the late 80s and early 90s. Most people still hold this view of equity release or at least remember the scandals (if you don’t remember then you are probably far too young to be reading a blog about financial services!) and view it with extreme scepticism. A lot has changed since then but has it made a difference and does equity release now deserve to be considered a legitimate option?

Before we get started, what is equity release?

Essentially, all equity release products are ways of getting cash from the value of your home without having to move out of it. There are actually different product types available including Lifetime Mortgages and Home Reversions with a number of different variations within those types. If you want a more in-depth guide then you could do worse than to look at the Financial Services Authority’s (FSA) consumer website. There is a PDF guide to equity release on this page.

So why are we even talking about equity release?

Many people these days are approaching retirement or have retired capital-rich but income-poor. This is largely as a result of both rapidly rising house prices (combined with around 70% owner occupation in the UK) and inadequate personal and state pension provision. With increased life expectancy there is now a fear, and indeed a genuine risk, that we will outlive our financial reserves and have a vastly reduced quality of life during retirement.

It seems to me that viewing property as a pension is increasingly prevalent – just look at the boom we’ve had in buy-to-let over the last decade. And many people already use alternative means of releasing equity – borrowing money against their home, downsizing, selling up and renting instead – so there is no reluctance to make use of cash tied up in property, just a reluctance to use specific equity release schemes.

Equity release by any other name

I think there’s a lot more equity release around than people admit – we just have different names for it. If I increase the borrowing against my home by remortgaging with an interest only mortgage is that not equity release? Of course it is but I don’t need to go to a specialist equity release company to do it. There is more competition in the equity release market now than there was 5 years ago – Norwich Union, Northern Rock, Prudential and Scottish Widows have equity release products – but still nothing like a full range of big name providers.

Why are all the big players not in the market? It may be true to say that if all the household names offered the service it would help to overcome the public scepticism. However, there was a rather scathing report by consumer watchdog Which? that pulled no punches when criticising household name Norwich Union. So perhaps the reputational risk is perceived to outweigh the opportunity. The fact is that many household names offer equity release products but they are kind of under the radar.

Is the poor reputation still justified?

Steps have been taken to clean up the equity release market. A trade body, Safe Home Income Plans (SHIP), was launched in 1991 and is in their own words “dedicated entirely to the protection of planholders and promotion of safe home income and equity release plans”. All providers who sign up to SHIP offer certain guarantees. For example, you cannot lose your home – whatever happens to the stock market or to interest rates. And under their no negative equity guarantee you will never owe more than the value of your home. These protections do not exist for standard mortgages. But let’s be honest, who trusts self-regulated companies? Especially those that have misbehaved in the past.

The Financial Services Authority (FSA) took on responsibility for the regulation of mortgage lending, arranging, administration and advice on 31 October 2004 – including Lifetime Mortgages. On 6 April 2007, Home Reversion plans also became authorised. So now the general public have more protection than ever before and recourse to complain should anything go wrong sales volumes have shot up right? Well, no actually. They are on the increase but are still pretty small beer in comparison to the mortgage market generally.

Is it just too expensive to be considered fair?

I think this might be the root of the issue. On a variety of Lifetime Mortgage known as a Roll-up Mortgage you borrow a lump sum or arrange a drawdown facility. Interest is added to the loan on an annual or monthly basis but you do not pay the interest until your home is sold. This means that interest is charged on your interest and this compound interest effect quickly makes your loan quite large. I think people see this and are horrified at how much they eventually owe. The article by Which? that I mentioned above provides an example:

If a 60-year-old borrowed an £80,000 lump sum with a typical equity release lifetime mortgage, it could cost them £256,570 by the time they were aged 80, and £343,350 if they reached 85.

Well that’s just the effect of compound interest for you. Why are we horrified? Just think of it the other way around and imagine you deposited £80,000 in a high interest account. Why, after 25 years it could be worth…

Equity release is expensive – that’s not a criticism of the providers though, just a fact about compound interest and borrowing money over a long period of time. Still, we don’t like to think we’re getting a bad deal. Equity release is a last resort product for those people who really really don’t want to move home but have no other way to release cash to improve their lifestyle in retirement.

As my old high school English teacher said ‘don’t open a whole new can of worms in your closing paragraph!’… Which? also claimed equity release mortgages are advertised irresponsibly, citing Norwich Union’s suggestion that its scheme could pay for a trip to New York or ’something for the family’. Illustrating this is the finding that the minimum £15,000 loan with Norwich Union would cost £28,000 after ten years’ time. I completely agree – advertising equity release as a way to fund a holiday is irresponsible. In my research for this article I’ve uncovered some interesting and rather scandalous practices going on in the US with equity release – they call it reverse mortgages – and I’m going to write something about that and other irresponsible/immoral practices next.