Since its inception, equity release lending has seen a slight decline. It could be argued that, in these “credit crunch” times, a steeper decline could have been expected. Equity release lending has specialist criteria to the usual property purchase mortgage, and these extra constraints could help or hinder a depressed market. Could the market do more to respond to the continuing demand for this type of lending?

Equity release lending is characterised by lenders offering products that allow homeowners, typically over the age of 55, to release capital from their home. This is usually by way of a lifetime mortgage or home reversion plan. I have defined these two types of plan further on in this article. Whilst the number of traditional mortgage products offered in the market has reduced significantly, there is still a large range of equity release products available.

The IFAs and intermediaries that I speak to regularly are generally of the view that enquiries for equity release are down on previous years as potential borrowers confidence in the financial marketplace has declined. This is not surprising given that those undertaking equity release are normally defined as being vulnerable persons, given their age group and sometimes complex medical concerns. They are also typically of a generation that has been frugal and cautious about their borrowing and spending.

Borrower types

This may be a simplistic view of the market and the attitudes of potential borrowers. It is not only confidence that has had an impact on the equity release lending market, it is also the decline in house prices. This appears to have given rise to two distinct types of potential borrowers:

• Borrowers that believe their home is worth more than the market value and are disappointed when they discover that the valuation does not meet their expectations and;
• Borrowers who believe that it is not worth considering making an application as they are of the view that their home does not contain enough equity for them to release to meet their needs

These are both issues of perception and often perception amongst the general public can be media driven. If the press continues to report on ‘green shoots’ of recovery, it is likely that potential borrowers may change their expectations. If the green shoots are not sustainable, then it is still possible that the attitude of potential borrowers may become more realistic.

Figures

Most providers of equity release products in the marketplace are members of the industry body, Safe Home Income Plans (SHIP). SHIP’s first quarter results for 2009 indicated: “The total value of equity release business written in Q1 2009 was £245.01m (Q1 2008: £245.8m). The average sum released rose 16 per cent year-on-year from £41,718 (Q1 2008) to £48,287 (Q1 2009″).” Although it has seen a decline in policies sold year on year at 14 per cent, “from 5,892 (Q1 2008) to 5,074 (Q1 2009).”

From these figures we can see that equity release products are still performing well and have not seen as large a decline as traditional mortgage lending. It would seem that some equity release experts may be underestimating the marketplace.

Government

Further discussion of equity release has been ongoing in government. On 2 April 2009, the issue of equity release was raised by Baroness Hollis of Heigham, a Labour peeress, in the House of Lords. Baroness Hollis asked Her Majesty’s government whether, “they welcome and will consider promoting equity release schemes that are fully regulated, avoid negative equity and are underpinned by independent legal advice”.

During the debate Lord Myners, the Treasury minister, said that he would like to see the government “take whatever action they can to encourage its growth”.

The debate raised the issue of disregarding equity release plans when calculating pension credits. The view of Lord Myners appeared to be one of caution on this point although he did confirm that he would look into the issues raised during the debate in respect of the pension credit rules. A full transcript of the debate can be found on Hansard.

This debate was significant as it highlighted regulated equity release as a way to assist the elderly in managing their financial affairs. This recognition that equity release is appropriate in some circumstances is a valuable step forward. There are obviously circumstances where equity release would not be an appropriate option for a borrower, and a borrower’s financial adviser will need to ensure that all the borrower’s options are discussed and adequately explained.

The debate also brought to the fore the issue of pension credits and the effect that they have on those taking out equity release. I do not propose to look at the impact of equity release and pension credits in this article, but only to say that there is a ticking time bomb in relation to pensions and with an ageing population in the UK, it is important for the government to take the lead on addressing alternative solutions, to assist those who do not have adequate pension provisions.

Equity release is certainly one way to assist those who are asset rich but cash poor, and if the government can look into ways of relaxing the pension credit rules for those taking out regulated equity release products, then that would go some way in providing further assistance to those struggling in their retirement years.

Further, any promotion of regulated equity release products by the government should be welcomed by all of those in the industry as it may assist in moving the public perception of equity release away from the horror stories of the 1980s (which unsurprisingly appear to dominate the views of some equity release sceptics) and lead to a greater understanding of the benefits of equity release amongst the public. Equity release still appears to be shrouded in unnecessary myth and although there have been advances in public perception over the last few years, it is my view that there should be a greater understanding amongst the general public about these financial products, their legal implications and how they can assist those in their retirement years.

Part of the difficulty of explaining equity release, may lie in the complexity of the structure of the products available. However, it might surprise many potential borrowers that equity release plans can be put into two main categories: Lifetime Mortgages and Home Reversion Plans.

Lifetime Mortgages

A Lifetime Mortgage is a loan secured on the property of the borrower and the borrower retains ownership of their property. The loan is typically repaid on the death of the borrower or other trigger event such as the borrower moving into long-term nursing care. The monies advanced are usually repaid from the proceeds of sale of the property. Often a lifetime mortgage will carry a ‘no negative equity guarantee’.

A ‘no negative equity guarantee’ can be a distinct selling point for a lender. The borrower may value this type of guarantee more in a downturn, as the borrower will not need to be concerned that their estate will be left to pay any difference between the re-sale value and the final loan redemption amount.

Home Reversion Plans

A Home Reversion Plan is a scheme by which a borrower can sell all or part of the borrower’s home to a Financial Services Authority (FSA) authorised provider of home reversion and home purchase plan products. A private individual can provide Home Reversion Plans but only if that individual can satisfy the FSA’s ‘not by way of business’ test.

It is usual for the legal title of the borrower’s property to be transferred to the Home Revision Plan provider and the borrower’s occupation of the property is secured by a lifetime lease which is registerable at the Land Registry, thereby protecting the borrower’s occupation of the property.

Since the regulation of Home Reversion Plans came into force on 6 April 2007, there has been a drop in the number of providers offering these types of products. Traditionally Home Reversion Plans were used as an alternative investment choice for some private individuals, and regulation has made it harder for private individuals to invest in them. This is welcome regulation as it brought Home Reversion Plans into the regulatory sphere in line with Lifetime Mortgages. Regulation has also increased confidence as it seeks to prevent rogue plan providers offering services to the elderly.

Those intending to offer home reversion products should ensure that they seek legal advice from a specialist in equity release, as equity release remains a niche market and not all solicitors are up to date with the rules and regulations governing equity release.

Home Reversion Plans should not be confused with sale and rent back products whereby a borrower sells their home to a provider and is granted an Assured Shorthold Tenancy on completion of the transaction. An Assured Shorthold Tenancy would not be offered in a regulated product as this would not give a borrower adequate security of tenure. Since the regulation of Home Reversion Plans, the marketing of sale and rent back products appears to have increased and some organisations may be seeking to avoid regulation by offering these types of products as an alternative to regulated equity release. On the other hand, it is also another indication that people are still looking at ways other than a traditional remortgage to release capital from their home.

Lenders

Many mainstream financial institutions still seem to shy away from providing equity release products for their customers. Is this a missed opportunity, given the current financial climate? Are equity release products a more reliable source of security for a lender than a traditional mortgage? These are questions of risk for a financial analyst to answer, but certainly the decline in house prices we have seen over the past year may cause some concern to lenders. However, some of those potential borrowers looking at equity release products have a large portion of equity remaining in their homes or are mortgage free, and this could be highly attractive to a lender.

The key to the promotion of equity release is building confidence in the equity release marketplace. To do this ethics and compliance must be employed as equity release schemes are complex financial products and as such those entering into them must receive financial and legal advice that is comprehensive, up to date and independent. A product provider will also want to ensure its borrower has received the relevant independent financial and legal advice. I do not propose to set out the legal processes that a lender or their solicitor will follow in detail in this article, but it is important to highlight that it is in the interests of both lender and borrower to be comfortable with the level of risk they are exposed to.

Lenders providing equity release products will want to assist their borrowers in seeing through plans to completion, but inevitably through the legal process, issues may be identified by the lawyers acting for the lender or indeed the borrower, that would prevent a loan from proceeding to completion. For example:

A lender will want to ensure that the property over which it will secure the equity release product affords adequate security and meets the lender’s individual criteria for the particular product being offered. A lender will also need to ensure that its borrower has sought the appropriate financial and legal advice so as to enable the lender to not only protect their security from claims by the borrower’s estate, but to ensure that they are acting ethically and complying with their duty of care to the borrower, which would include observance of the FSA’s Treating Customers Fairly (TCF) policy.

An equity release product will have risks as well as benefits for a borrower and equally a borrower may present a risk to a lender. A lender will want to ensure that its borrower has legal capacity to enter into a contract and this is often more difficult to assess due to the age group of the borrowers. Issues of capacity and undue influence and fraud are considered by the borrower’s solicitor and it is essential that the lender obtains some form of comfort on which they can rely.

A lender’s product must comply with the relevant rules and regulations set down by the FSA. Products from lenders that subscribe to SHIP carry a SHIP certificate. The legal adviser acting for a borrower is required to give this certificate on completion. The certificate sets out a number of statements, including that the borrowers have had the full effects of the plan explained to them, that they have received independent financial and legal advice, they have discussed the matter with their heirs and beneficiaries and that they are aware of the effects that the plan may have on their entitlement to state benefits or pensions.

Whilst these certificates go some way in assisting lenders to comply with the rules and regulations as set down by the FSA and membership bodies, the lender still needs to ensure that a complete process of due diligence has been carried out from the outset of the application through to completion and this is often obtained by implementing a risk management strategy.

Lenders that do not subscribe to SHIP often follow SHIP’s code of conduct and require the borrower’s solicitor to give the same type of certification. Some providers that do not subscribe to SHIP often try to provide ‘SHIP compliant’ products.

Solicitors

A lender can work with its solicitors to try and achieve a seamless process from issuing the offer to the borrower to completion of the product. This may include setting up checklists so that the solicitor acting for the lender can identify at the earliest opportunity any properties that would not fit with the lender’s requirements for its products.

By identifying any issues at an early stage (including title issues), unnecessary costs for the lender and its borrower can be saved. From a borrower’s perspective it is better to know early in the transaction whether or not the plan can proceed, as many borrowers begin to rely on or make plans for the equity that they are trying to release.

Agreeing mandates with the lender’s solicitors can also assist in moving the legal process forward as the lender is then delegating some of the decision making processes, thus cutting down on its own paperwork and enabling the solicitor to effectively manage the process. It is important to try and incorporate the expectations of a lender’s borrower into the legal process and a key to this is structuring the transaction in such a way that it can proceed quickly to completion observing all due legal process whilst at the same time achieving a high level of service for the lender and protecting the lender’s reputational risk so that the lender remains a leader in its field.

Regulation

The equity release market is now heavily regulated, which is welcomed, as it shows there is transparency and accountability for lenders and instils confidence for consumers as they have re-course against a lender if they have a complaint. As such, the processes employed by lenders when contracting with their borrowers must ensure compliance with the FSA regulations and codes of conduct as well as those relevant to their memberships of any other professional bodies. SHIP’s code of conduct has become a benchmark in the industry.

Lenders should regularly review their security documentation and terms and conditions to ensure compliance with any regulatory changes and they should always seek the appropriate legal advice from an equity release specialist.

These are still exciting times for equity release with the government having recently raised issues in the House of Lords and industry bodies working tirelessly to promote a better understanding of equity release. The question is, will more financial institutions look at entering into the equity release market over the coming year given the current state of the financial markets? Notwithstanding whether or not new lenders come on board, can the image of equity release be taken forward as a safe option for those looking to fund their retirement?

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