Equity release is more attractive when you show clients the alternatives, argues Peter Welch, head of sales and distribution at Bridgewater Equity Release
It is still somewhat puzzling to see the equity release market’s continued heavy reliance on lifetime mortgage products with home reversion plans still totally discounted by some ‘specialist advisers’. Now the cynic in you might think, ‘Well you would say that’, however I do not believe for one second that reversions are a panacea product relevant for all customers, however I do believe that advisers should be giving serious consideration to reversions and would suggest that they be offering a home reversion recommendation to approximately one in five of their potential equity release clients.
The overall lending figures however still show an overwhelming lifetime mortgage bias, which leaves me to wonder why this one in five recommendation ratio is not in place already. Given that I meet many advisers every month, I’ve come up with a hypothesis for why home reversions are not achieving their potential.
It’s really very simple. We all know that clients are uncomfortable with the concept of selling their home at a discount and to be honest most advisers are too. We also need to add in the fact that most advisers don’t have the information to hand to reassure customers that when appropriate a home reversion is not only good value for money but also provides a high level of security and certainty as well as viewing the product as a relatively sophisticated financial planning tool.
Many advisers ask me when a home reversion plan is suitable for a customer. My answer is always based on the customer’s soft facts i.e. their attitude to risk in the areas of house price inflation, longevity of life expectancy, whether they wish to guarantee a legacy and the need for guaranteeing future releases. So the most ‘cast iron’ reversion recommendation is to a client who is worried house prices may stay flat or fall, is concerned they may live too long (many customers are frightened of compound interest), want to guarantee that at least 50% of the value of their home is left to their beneficiaries and needs to know they can access further withdrawals if there are unforeseen needs in the future.
In essence if all this information stacks up, the only true recommendation that can be made is for a home reversion plan. There are of course many other reasons for recommending the use of reversions including:
* If a client doesn’t want to take on debt.
* Power of Attorney cases or cases where the property is held in trust.
* If the client wants a modest release with low set-up costs.
* When the estate doesn’t want the burden of selling the property upon death.
* When the clients want to buy a new property at a discount to the agreed sale price.
While these are all solid reasons for home reversions advisers will often tell us that the two major stumbling blocks they encounter with clients when they do recommend a reversion are, firstly, the issue of property ownership and, secondly, the perceived value for money of a home reversion.
Dealing with the point on ownership first, when taking out a Bridgewater reversion customers are granted a lease for life which entitles them to live in their own home for the rest of their life (or until they choose to leave), rent free. This lease for life is also registered at the Land Registry and it is this fact that is evidence of the client’s legal interest which is held pursuant to the home reversion plan. Therefore, what advisers and customers need to remember is that in reality the legal ownership of a property under a home reversion plan is actually no different from owning a leasehold flat/house and it is fully recorded at the Land Registry in exactly the same way. I do not know many advisers or customers who would not be comfortable buying a long leasehold property therefore why should there be any discomfort with a reversion plan?
Secondly, I’ll address the issue of ‘value for money’. Many customers initially expect a reversion provider to buy their home at full market value and allow them to live there for life rent free unsurprisingly they are ultimately disappointed that the price paid is discounted. Well the good news is that providers like Bridgewater do actually buy the property at the value the independent RICS surveyor puts on the property.
Essentially, the difference between that full market value and the discounted price paid by the provider can be viewed as a single premium ‘one-off’ rental payment that the client pays which provides security of tenure for life, offering no worries about inflation-linked rental increases.
With this in mind, I would encourage advisers to get their clients to carefully think through the option of selling and moving into rented accommodation as an alternative to equity release at the very start of the sales process. How much could this option cost over their lifetime as opposed to the use of a home reversion? The number crunching will probably show that the cost of making that move to rented accommodation and paying rent for the rest of their life is far in excess of the ‘premium’ they would otherwise pay via the reversion.
Given that these are two natural concerns from clients it is important that advisers are confident about dealing with them and offering insight and information on how these ownership and value for money worries can be addressed. Looking at the points we have outlined above should soothe the concerns that may exist and ultimately deliver a satisfied client. And one thing I know to be true is that all equity release advisers want happy customers.