Equity release: from dirty words to clean sheets

 

You may well have seen the recent BBC website article ‘Is equity release still a dirty word?’ An interesting question... how might we answer it?

 On one level, the answer is very clearly ‘no’... since it’s two words, not one. But now I’ve got the pedantry out of the way, it’s only fair to admit that the article was well balanced and raised some important points. Perhaps the most salient of these concerned the thorny issue of compound interest, Einstein’s supposed ‘most powerful force in the universe’.

 In case you missed it, the article’s premise was this: 

  • A house is worth £300,000 and its owner takes out £100,000 in an equity release plan at age 60. The interest rate is 5.4%, fixed for life. 
  • After one year, the amount owed is £105,400. This sum is then used as the baseline for the following year’s interest... and so on. 
  • This means that when the homeowner reaches 80, the debt is £286,000. The article concedes that the house may have gone up in value, but if not, the homeowner will have just £13,707 left to pass on – and if they live one more year this will be nothing at all. 

All fair enough. But that ‘if not’ is a pretty big if. We could choose to give equal billing to the supposition that house prices do increase over that 20 year period. And if we do, it’s important to think about the way changes in house prices are quantified. 

When we read that prices have increased by, say, 3% in the last year, this doesn’t mean they’ve increased by 3% from whatever amount you originally paid for your home, however many years ago that may have been. So, taking this further, if prices increase by 3% on three consecutive years, they are rolling up – compounding, if you like – in the same way as the interest. The increase is on the new value each time.

This simply demonstrates that prospective equity release customers need to look at the whole picture – including the ‘what ifs’, both bad and good – before making a decision.

So let’s do just that, and return to the supposition that house prices don’t go up. How then should we look at those compounded interest rates? You might choose to think that they represent poor value. But this may not be the full story either.

 

The linen’s not dirty any more

It’s important to remember that today’s equity release products are very different from those of the 1980s and 1990s, and you could argue that you now get more for your money. The BBC’s article goes on to quote Nigel Waterson, chairman of the Equity Release Council, who describes equity release interest rates as ‘simply the cost of providing consumer protection, such as guaranteeing that homeowners will not be responsible for any negative equity.’

This is a central issue. For some time, those of us within the industry have been working hard to make sure that equity release is judged on its present day merits, not the sins of its past. Products and options are now available which counter many of the time-honoured obstacles that justifiably caused many people to look in a different direction in the past. These now include:

  • Guarantees of no negative equity
  • Optional inheritance protection guarantees
  • Fixed interest rates
  • Voluntary partial repayment options
  • No mandatory repayments during the loan term, unless you die or move into long term care.

The adoption of SHIP standards in the 1990s, along with subsequent changes in regulation under the auspices of the FCA and Equity Release Council, have made major differences to the reality of equity release. But as we know, there’s still plenty of work to be done by all of us to make sure the image catches up with the reality.

The industry has dealt with its laundry very publically... but the persistent stain of equity release’s ‘dirty word’ reputation is proving harder to erase. Isn’t it time to wipe the slate clean and let the product stand or fall on what it is today, not what it once was?

To find out more about equity release and how Aviva can support your work in introducing your clients to this product, please get in touch with your usual Aviva contact. 


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