Peter Lucas, chief executive of Newlife – home related finance, provides his thoughts on the future of the home reversion market and what intermediaries can/should do to help things progress
The long-term potential of the equity release market has been apparent for some time now. To date growth has been steady rather than explosive, however demand is building inexorably and going forward it has a major role to play as a cornerstone of retirement planning.
The inescapable fact of the matter is that demographics in the UK are changing: better lifestyles and innovations in medical science mean people are living longer than ever before.
But as financial advisers will testify, at present planning for old age in the UK is neglected by too many people, which means that increasing numbers are entering retirement with inadequate savings and pension pots.
As a result, successive governments have come under increasing pressure as greater demands are made on the State pension and the provision of long-term care in retirement. To quantify the scale of the problem, the Think Tank Reform Group recently forecast that the number of people of working age for everyone aged over 65 will drop from 3.9 this year, to 3.2 in 2021, and 2.5 by 2041. This means greater amounts will be required from a shrinking working population to fund the growing retired population.
For most people in retirement their home remains the largest asset they own, and therefore being able to release the money tied up in property in order to pay for specific needs and/or to supplement other income streams is an obvious solution to this problem.
At the moment the equity release market is dominated by lifetime mortgages. But current market conditions mean the circumstances are right for the share of home reversion plans to increase. The reasons why home reversion plans are set to grow are compelling. In the current housing market where house prices are static/falling with a lifetime mortgage the debt and effect of compound interest can end up accounting for a larger percentage of the property’s value, whereas a home reversion plan is based on a set percentage of the property being sold. This can provide certainty that people’s beneficiaries will still get a share of the property.
Home reversion plans can also be more suitable for those looking to release a more substantial sum than is possible with a lifetime mortgage. People can choose to spend the money from equity release any way they see fit, but with university fees set to rise significantly from next year, and the age of first time buyers passing the mid-30 point as deposit requirements are raised it is likely that people will increasingly seek to help out younger generations if they can afford to.
The recent publication of the ‘Dilnot Report’ is another strong indication that equity release will have a central role to play in retirement planning going forward. The proposal to cap an individual’s maximum care bill at £35,000 (not including food and accommodation) means the lifetime cost of long term care can be quantified. If taken forward by the government – once all the rules surrounding long-term care payments are clarified – insurers will then be able to target this market with products designed to meet these costs. However, the equity release industry already has lump sum and drawdown products which are likely to be suitable for meeting long-term care payments.
Home reversion plans can be used to release a proportion of equity from a home without any stipulations of how it must be used. They also have the advantage that in the future, depending on their age and the amount of equity left in the property, people can go back and release further amounts.
At present, some homeowners who would benefit from home reversion plans are put off because they regard the schemes as too complicated and are averse to the perceived downsides of selling a percentage of their homes. This is an opportunity for informed IFAs to provide a valuable solution that takes account of all their needs and concerns. In truth home reversions provide the same security of tenure as a lifetime mortgage, and because they can ring-fence a set amount it gives people greater certainty in their future finances and can make retirement planning much clearer. Therefore, it is important that IFAs fully understand the benefits of home reversion products and how they can be communicated to clients.
It is also important for the equity release market as a whole that the home reversion sector continues to grow, as a strong market is one with a wide range of product choice and innovation. Consumers are more likely to find a product that suits their needs and more providers are likely to enter the market as its popularity develops, which means more choice and even more consumers will benefit.
