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If, like me, you are a child of the Seventies you probably recall some classic TV sitcoms from that era such as The Good Life.
I was watching a Royal Command performance of that show recently. It featured a rather worried Tom Good starting to fret about old age. In particular, what would become of Barbara once Tom died? With no pension savings to fall back on and no income, the future looked bleak.
He comes up with a solution – a form of Home Reversion – and tries to persuade his bank manager to buy into it. In essence, he wanted the bank to give him a loan – enough to give him and Barbara a reasonable income in retirement – and in return the bank would get his house to sell once they were both dead.
The scheme hinged on Tom’s house – which he said was worth “£25,000” – increasing in value to help pay back the debt, plus interest. The rather sceptical bank manager however is not convinced the house value will ever increase enough to cover the debt (he calculates it will need to increase five-fold) and shows Tom the door.
Fast-forward to today, and the market for equity release (lifetime mortgages and home reversion plans) is huge and growing year on year..
And yet the size of this market (£1.4 billion of loans in 2014 and predicted to be closer to £2 billion this year) is tiny in comparison to the almost £1 trillion of housing wealth owned outright by today’s 65+ homeowners. So why isn’t the equity release market much bigger?
Research that more 2 life carried out recently showed that while 44% of homeowners now regard their property as part of their retirement assets, a worried 47% of those aged 65 and above simply don’t trust equity release products. 51% said they wouldn’t use these products because of high rates while 41% said they were worried about inheritance.
What this research underlines is the need for greater education of consumers about the benefits of equity release. Many will be unaware of the fall in interest rates in recent years – we are now seeing rates around the 5% mark and surely soon to see rates that start with a 4 or perhaps even lower. There are also of course safeguards in place – such as the ERC’s No Negative Equity Guarantee – to ensure that the debt does not spiral out of control and become a burden for the next generation.
As the pension reforms bed down and more and more people start to look beyond their pension savings and start to consider other assets at their disposal, many will come to realise that their home could provide a significant boost to their retirement finances.
Today, the average house in the UK today worth almost ten times the average pension pot, so it’s not hard to see how equity release could provide the path to a much more comfortable retirement and provide more options for a client’s changing needs.
As an interesting footnote to all this, the very house used for filming the series (in Northwood, Middlesex) last changed hands in 2001, for £475,000 according to Right Move – roughly four times the loan plus interest Tom had been looking for and nearly 20 times its value back then. His bank missed out on a tidy profit there.