Despite rising consumer demand for both products and advice in equity release, for law firms, it remains a niche market.
Speaking at an event organised jointly by Today’s Conveyancer and Today’s Wills and Probate, Equity Release Council Chair David Burrowes, said that of their 229 members, approximately 30 were law firms. He said: “We need more solicitors to feel confident in offering advice around equity release giving good advice to consumers in order to ensure that advice is delivered in line with best practice.”
During a roundtable discussion with solicitors, conveyancers and estate planners, participants considered possible reasons for a lack of engagement with equity release:
- Practical considerations around the need to deliver advice face-to-face which raised some logistical challenges
- The level of fees which could be charged in order to mitigate the extra costs that would be incurred
- Concerns about having the appropriate Professional Indemnity Insurance.
In addition, there is perhaps continuing nervousness surrounding certain historical issues such as:
- ‘Bad press’ for equity release products and concern about reputational damage arising
- Reticence due to the sometimes complex nature of the products and practical considerations such as differing lender requirements
The idea that these issues are still lingering in some quarters, despite being historic, highlights the lack of awareness of the market, as well as how attitudes have changed over recent years.
Strong demand for equity release advice
The group included a mix of advisers who already work in the area of equity release and those that don’t (some of whom are considering getting involved).
All agreed that there is strong market demand for equity release products and therefore for advice in the area.
The Spring 2018 Equity Release Market Report, published by the Equity Release Council, shows that:
- Equity release is attracting twice as many new customers as five years ago
- Annual growth exceeds the entire size of the market in 2010 and 2011
- Equity release lending activity across all customer groups increased by £909m compared with 2016 (£2.15bn)
- Lifetime lending sees fastest growth within overall mortgage market for a second year
- Housing wealth withdrawals grow in proportion to flexible pension payments with 55p of equity released for every £1 of savings withdrawn
- 34% rise in customer numbers outpaces growth in first-time buyer, remortgage and homemover activity.
Lenders are responding to consumer demand by introducing new product options. The number of products available is growing by 25% year on year. Products are also becoming more flexible so that people can make ad-hoc, penalty-free voluntary repayments. Financial marketers also continue to work on attractive rates for the products with average product rates continuing to fall despite the base rate rise, with the typical customer securing a rate of 4.44%.
The trend shows how equity release has become a more widespread financial choice among the over55s as a way to use their property assets to help meet their financial needs. As a result of this increased activity, older homeowners unlocked nearly £10m (£9.7m) of housing wealth every day from January to March 2018: up from £4.3m a day during Q1 2016.
How are clients using equity release?
Clients apply for equity release for a number of reasons: to take a trip, buy a new car, make home improvements or adapt their home to suit their changing needs. They may need to re-pay a mortgage – e.g. an interest only mortgage and another high street mortgage is not an option.
Equity release can also be used to finance transactions such as: purchase of a new property, making home adaptations to meet specific needs, repayment of debts, payment to an ex partner, family member, lease extensions, freehold purchase or gifts to children or grandchildren for house deposits. The release of equity release funds can usually be timed to coincide with completion of these transactions.
Even if a firm does not deal with equity release applications as standalone transactions, solicitors may still encounter these mortgages in the ordinary course of day to day business. Many would currently look to refer these cases on to a specialist firm rather than take them on themselves.
Estate planning advice, for example from financial advisers, is also contributing to demand. For example, before reaching age 75, a client may be advised to leave their pension pot tax-free to children; taking out equity release to live on. The result is a reduced inheritance tax burden which will appeal to many consumers.
Why is equity release needed?
The rise in popularity of equity release products is driven by wider socio economic factors such as:
People are living longer
- 37% of people will be aged 55+ by 2045 (currently 30%)
- 25% will be aged 65+ (currently 18%)
People are working longer
- Over 10 million over-50s are currently in work – a record high
Pension incomes are changing
- Future defined contribution pensioners with 8% contributions can expect a pension worth only 15% of their final salary
- This is only one fifth of the pension of an identical worker in a defined benefit scheme
Housing equity is growing
- Homeowner equity in England reached £2.6 trillion in 2016
- £1.8 trillion belonged to households aged 55+, an amount forecast to double by 2036
Types of equity release products
Today’s equity release landscape is a consumer’s market with lots of choice and competition. Types of equity release plans include:
- Home Reversion Plan
- Consumer sells a fixed share of the property to a provider of between 30-100%
- Provider pays consumer a percentage of that share tax free
- No interest added
- Provider receives their share of property value on its sale
- Lifetime Mortgages
- Multiple methods including roll-up and serviceable plans
- Consumer extracts funds in a single lump sum or in smaller amounts over time up to the maximum limit agreed with the plan provider
- Choose to pay interest and/or pay some capital
Money can now be paid in two ways:
- As a single tax free Lump Sum, or
- Be withdrawn from a cash reserve as and when needed.
David Burrowes said: “The future challenge for industry and regulators is to satisfy wider consumer needs while ensuring innovation is combined with protection and long-term sustainability.”
The insurance position
Solicitors at the event said that professional indemnity insurance was an issue for many firms. Paul Sams, Partner at Dutton Gregory, said: “Many PI policies will not cover, for example some of the older home reversion products and with more and more interest only mortgages coming to maturity clients may look to equity release products to solve the problem. We are going to need more and more specialists who are confident with the advice and that have the appropriate level and nature of insurance.”
David Burrowes said that membership of the Council can be of great use in this area. “We sit above the basics of regulation and qualification which underpins the market,” he said. “The Council principles and rules exist to ensure that the market is fully regulated and safe. The Council Safeguards ensure:
- Tenure for life
- Freedom to move to a suitable property
- No negative equity guarantee
- Independent legal advice.”
Estate planning issues
The wealth gap between younger and older generations has become an increasingly political subject. £1.8tn belongs to households with a homeowner aged 55 years old and over. Equity release is increasingly being used as a means to provide a feasible solution to the financial pressure faced across the generations – the youngest in particular. Whilst passing on assets in a Will is an effective way to distribute wealth, the increase in life expectancy means that where children and grandchildren are included, they will only benefit from the inheritance much later down the line. Equity release offers a way to provide younger generations with financial support at a time when they most need it.
The current Inheritance Tax Review being undertaken by the Chancellor means that further change could be afoot – with implications and opportunities potentially arising for solicitors.
Equity release is an area where the lines between property/conveyancing advice and private client work become increasingly blurred. Indeed sometimes advice can be at odds between the two disciplines.
An example given by Paul Sams is where clients must be joint owners (joint tenants not tenants in common) to take out the products. Whilst this might be beneficial for IHT purposes it may not be so good from an adviser’s point of view who is trying to put in place best plans for care fees in later life for example.
The group all agreed that helping clients plan for later life raised issues around establishing mental capacity which causes solicitors anxiety in knowing how to properly apply the test. A number of conveyancers present said that they were not at all confident in carrying out the assessment – especially when many GPs were themselves increasingly refusing to make an assessment – as it was not traditionally a part of their practice. Although being aware of any potential vulnerability issues was very much at the forefront of a conveyancer’s work it is a common perception that private client lawyers are much more confident with issues around mental capacity.
Tim Farmer of TSF Consultants, a specialist consultancy offering mental capacity assessments, said: “It’s really important to know the difference between capacity and vulnerability and to be confident in making mental capacity assessments. Our business is growing rapidly as firms choose to outsource the assessment to professionals who specialise in this area rather than undertake them themselves.”
Simon Wagner, partner at Martin Kaye, said this also needs to be factored in to the cost of providing the advice. “There is a drive from some quarters to carry out this work for the cheapest possible price,” she said. “However this does not really fit with the amount of time and attention that needs to be spent on carrying out this type of advice properly.”
What does a sol need to do?
Rule 8 of the Equity Release Council’s standard outlines the requirement for independent legal advice is a key feature for consumer protection. The Advising Solicitor must sign a certificate confirming they have:
- Prepared a written report particular to the product, advising on the risks and rewards
- Ensured – so far as reasonably possible – that the client is not under duress
- Checked that the client has sufficient mental capacity
- Verified the identity of the client
- The client should be properly advised upon the nature of a lifetime mortgage.
- To satisfy the lender, the legal advisor will also need to check the title, ensuring that it is suitable for the requirements of an equity release lender and remedying any issues or defects.
As a minimum the solicitor must:
- Perform a title check to ensure the property meets requirements.
- Advise the client on the mortgage product – but not straying into financial advice.
- Certify that we have verified ID and ensured, so far as reasonably practicable, that the client is not under duress and has sufficient mental capacity. Solicitors may need to deal with attorneys, but must perform additional checks on those cases.
- The certificate can be signed by a Licensed Conveyancer, Chartered Legal Executive, Solicitor or Barrister.
- If the title does not meet with requirements, additional work may be required: e.g. removal of charges, restrictions, cautions, notices, investigating trusts, tracing devolution of title upon death, lease extensions, freehold purchases, first registration… there is huge variety of work/titles.
Factors to consider
Lenders have different requirements.
Some lenders require outgoing transferors to obtain legal advice plus a signed form from their legal advisor confirming that they have checked ID/provided the transferor with legal advice which can result in additional time and cost.
Some lenders will require sight of an order if the transfer is pursuant to something agreed in writing and will not lend if they are not happy with the terms, e.g. in a divorce they will require the order to specify ‘full and final settlement’ and that both parties have had disclosure of one another’s details
Turnaround – All equity release lenders are separately represented. This naturally has an impact on transaction time.
Lender’s solicitors generally do not deviate from their requirements as they work in a volume industry so processes are standardised. It’s best to confirm requirements at the outset to avoid unexpected hold ups later on.
Instruction – if you haven’t set out to undertake equity release work but encounter the mortgage in a related transaction, consider early on whether you want to deal with the mortgage or instruct a specialist firm to liaise with.
Home Reversion plans require you to treating the case almost like a sale – so need to send the client a Property Information form for example as the lender will make the basic enquiries that a buyer would make.
Leasehold properties – supply the information usually provided when dealing with leasehold purchases – LPE1 enquiries
David Burrowes concluded by saying: “The sector needs bandwidth as the market spectrum widens. It’s important that we ensure we have the support and growth of the service provision for the consumer to allow for reliable access to appropriate advice.”