Equity release products are becoming an increasingly popular option to home owners looking to release cash, especially with the over 65 population. However despite the increase in use and the encouragement of these products from the Equity Release Council, advisers need to tread with caution to ensure customers are aware of the potential pitfalls.
As part of RPC's series on emerging risks (following our recent peer-to-peer lending blog) this blog looks at the growing popularity in equity release products and the potential pitfalls advisers should be wary of.
"2018 saw the equity release market cement its position in the mainstream of financial services" states David Burrowes, Chairman of the Equity Release Council. Well, if 2018 was the year it was cemented, 2019 will be the year it expands that position substantively. Equity release is becoming an increasingly popular option with more than £4bn of borrowing released in the last year. It is understood that 22,126 equity release plans were taken out between January and June 2019; 5.6% more than the same time the previous year. The figures show a trend of equity release products becoming more popular once again, after years out in the cold following concerns that the product was not well protected and was not transparent for individuals.
Introducers (who for equity release products are typically advisers who lack the permissions necessary to advise on equity) create partnerships with other advisers who they will refer clients to. Of the advisers surveyed it is understood that an estimated 11% of their income in the next 5 years will come from equity release referrals, which has led to suggestions that equity release is having a resurgence.
The Equity Release Council has recently been encouraging advisers and regulators to promote equity release more in an attempt to help deal with the rise in the number of retired individuals needing a cash injection. Indeed growing consumer demand has meant that the number of equity release products has risen from 130 types of product in August 2018 to over 221 today.
Despite the encouragement for individuals to consider equity release as a potential option, advisers should remain cautious not to recommend such products to everyone. There are a large number of risks associated with equity release products that advisers should highlight to anyone considering equity release, including:
Interest rates are higher than a typical mortgage product, which can lead to interest charges mounting up over several years. In some cases, families have owed the entire value of the house to the equity release company;
A home reversion equity release plan effectively sells part (or all) of a property to the provider, meaning that any investment in the property and subsequent property value increases will be lost;
A lump sum of cash from the equity release may change an entitlement to state benefits meaning that individuals could forfeit entitlement to benefits such as pension credits
Advisers will need to ensure that equity release is the most suitable option available to that specific individual and that there are no other options (including pension lump sums or downsizing to a smaller property).