Mortgage Talk Managing Director Andrew Frankish Looks at the Potential Pitfalls

Until recently, equity release had a limited appeal for both customers and brokers. The 1991 introduction of the Safe Home Income Plans (SHIP) - of which 90% of providers are now members - saw equity release schemes start to improve their reputation, gaining further credibility following the regulation of lifetime mortgages by the FSA.

One major factor that has helped lead to the increasing respectability of the equity release market has been the burgeoning demand for these types of products. We have an ageing population that often needs other means to enhance their income. The shortfall in pensions is a serious and growing problem. In fact, many older homeowners openly admit that their home is either all or a large part of their retirement assets and, due to increases in life expectancy over the last few decades, older people will need more money to fund their retirement needs for longer.

Another aspect that has contributed to the increasing popularity of equity release is a change in social attitudes. Older people are no longer solely focused on bequeathing their home to their children. Many want to take full advantage of the opportunities that retirement brings and require funds for activities such as travelling, making renovations to their home or purchasing a new car. Others will choose to release the equity in their home to help their children and grandchildren make a deposit on their own houses.

There is little doubt that equity release is set to grow exponentially, as the population continues the get older. According to the CML, this is the fastest growing financial services sector, with a market value assessed to be worth £5 billion by the end of the decade. Added to this is the fact that the IFS and CII are now offering qualifications in equity release products, while regular roadshows help educate intermediaries.

Against this backdrop, switched on brokers are becoming increasingly eager to offer their ‘young elderly’ clients various equity release products and services. However, the FSA’s regulations place great responsibility on intermediaries and lenders to ensure that they give the right kind of information to potential customers. Moreover, the CML and Age Concern have both issued guidelines on how brokers should act in the offering of advice on these products.

A whole range of potential issues must be considered, including tax consequences, the possible loss of state benefits, alternative routes to fund raising, not to mention the likely need to consult with beneficiaries under any will, so as to avoid the likelihood of litigation by the estate.

So, given the levels of advice that brokers must offer in this highly sensitive market, should they be dedicating their resources into setting up a specialist department, or even considering referring cases to a third party intermediary?

One of the problems that we experience in this market is the absence of a decent sourcing system. Unlike the mainstream market, no Trigold equivalent exists, and this means that many brokers will struggle to offer their clients genuine ‘best advice’.

If we look at an example of a typical fixed rate £50,000 loan over 15 years, the difference in interest payable between the lowest and the highest quotes is almost £12,000 over the life of the product. This makes it extremely difficult for brokers to defend recommending a higher cost provider unless client criteria dictate otherwise.

With dramatic differences such as these, mistakes could prove costly in the future if a client or their family chooses to complain. After all, the FSA’s rules require that a firm should, out of all the regulated lifetime mortgage contracts identified as being appropriate for that customer, recommend the one that is the least expensive for that customer, taking into account those pricing elements identified by the customer as being most important to him.

As well as having sound regulatory issues for choosing either to set up a specialist department or refer to a third party provider, brokers should recognise that it is good practice to offer their clients a full range of products. At Mortgage Talk, we have implemented a system where our non-specialising brokers refer their equity release cases across to two employees that focus purely on these cases, and who are able to keep entirely up to date with market developments and new product initiatives.

All the evidence suggests that equity release is here to stay. With more lenders entering the market and a social climate where the population is ageing, releasing equity in property looks set to become an attractive option for many older people. But, as ever, brokers need to make sure that they have the mechanisms in place to ensure they can offer best advice, or be prepared for the consequences.

Andrew Frankish
Managing Director
Mortgage Talk