Debt consolidation is the top reason for home reversion, explains Peter Welch, head of sales and distribution at Bridgewater Equity Release
As an intermediary-only provider of reversion plans a great deal of our resource, energy and time is put in working with advisers to ensure they can get the most out of the sector and that they are clear about the products we offer and the solutions they can provide. We believe that it’s only when advisers truly understand the products themselves and the situations in which they are right for the client, that they will be able to market their services effectively and see where the client has most to gain from opting for a home reversion.
Since we began offering reversion plans to customers we have always asked the customer why they took out the product – collating the results over the last three years gives an interesting picture on why the money was needed, particularly as the period stretches from the pre-Credit Crunch days of early 2007 to the UK’s eventual, and one hopes sustained, emergence from one of the deepest recessions this country has ever known.
Post-completion of the plan each Bridgewater customer is asked to complete a survey which asks a variety of questions about the quality of their experience but also how they will use the money. We provide 15 options and ask the customer to choose the one which they plan to spend the majority of their released money on.
The most popular option for the last three years has perhaps unsurprisingly been the repayment of their mortgage. The number of retired customers looking for cash to do this is only likely to grow over the next couple of years this is because during the credit boom times many lenders were willing to lend to those in or near retirement in order to increase lending volumes and get business on the books. However, we now have a very different type of lending environment and in all likelihood we are going to see large numbers of borrowers coming off special deals or fixed rates and moving to SVRs. Then finding that a rate rise means they struggle to keep up their monthly repayments or may have to make other sacrifices to do so. To make matters worse, for many of these borrowers a remortgage is out of the question as they may not now meet any new lenders’ criteria.
We already have customers who prior to taking out their home reversion plan found their monthly mortgage payments were now over 50% of their total monthly income. The reversion plan has fundamentally improved the quality of their lives by removing the burden of the mortgage and immediately boosting their disposable income by 50%. In return they have security of tenure in their own home for their lifetime or until they need to move to long-term care.
The second most popular reason for taking out a reversion plan over the three years has been to conduct home improvements. As the individual becomes older it may well be that they need to change the layout and structure of their home to ensure they can move around easily. Or it may just be the retired individual is now taking the time to make the home more comfortable perhaps using the cash to fund a conservatory, a new kitchen or a loft conversion.
Debt consolidation makes up the top three reasons for the use of a home reversion plan and again, given the nature of the economy in recent times and the growing indebtedness of British society as a whole, this seems understandable. The numbers of customers citing this reason decreased in 2008 (12.7%) from 2007 (13.6%) but as the Credit Crunch and recession bit in 2009 it increased again this time to 15.2%. All suggestions are that, given we remain in a somewhat fragile state of economic recovery, it would not be completely surprising to see the numbers of customers using the money to pay for all their other debts to increase.
Interestingly, specific purchases also gained ground in 2009 as reasons why equity was released. Last year one in 10 customers funded a vehicle purchase with their released equity up from one in 20 in 2008, while 6.5% bought a holiday home or another property when no-one used the money for this reason in 2007. Using the money to travel fell in popularity last year as did the gifting of money to others it would seem that the money was used for more immediate, often financial needs, at home rather than lifestyle choices. Again, the fact that no customers used their equity as an emergency fund or to fund long-term care in 2009 suggests that the cash is often used for more short-term measures, although we fully anticipate a major increase in the number of individuals using equity release to fund their care needs in the years ahead.
All in all we are seeing three main reasons for the use of our home reversion plans: repayment of the mortgage, funding home improvements and debt consolidation. In all likelihood these three will remain as the top choices in our figures for 2010 and we may well see an even greater number of customers using their money to either repay the mortgage or their debts. The impact of the recession and Credit Crunch, particularly the scarcity of mortgage funding and lender’s own diminished appetite to lend, is likely to bite further, therefore advisers should be on the look-out for clients who fit this bill and there is always the potential to work with mortgage advisers who do not cover equity release to ensure the introduction of this growing band of potential clients.
