In good shape
Share
Despite the withdrawal of some equity release lenders there’s still plenty of business to go round, but brokers may have to change their approach to cash in
When the industry looks back on 2009 it will be seen as one of the toughest years in financial services history. Everyone from consumers to multimillion pound corporations in the City have had to fight for survival but no group has faced a tougher challenge to prove their value and maintain their livelihood than brokers. The intermediary sector has good reason to feel hard done by this year but ever a resilient bunch, many have begun to look at ways of optimising their income.
Diversification has become the key word as brokers explore new and innovative ways of adding to their business. One sector that many brokers have dipped their toes into - or at least contemplated doing so - is equity release.
With finances tight across the country for many over-50s the idea of using the money tied up in their homes to provide additional finance has became attractive and this could be just the opportunity brokers are looking for. Well, that was the idea anyway because just as those elusive green shoots the market had hoped for began to make an appearance it seemed the equity release sector was suffering a delayed reaction.
This autumn alone, several players have withdrawn from the sector. Early in October Saffron Building Society said it would temporarily pull out having already met its lending quota for the year. The society says withdrawing from the equity release market will ensure its portfolio remains balanced.
“We believe equity release presents a growth opportunity and will review our options next year,” says a Saffron spokeswoman.
And Saffron was not alone. Northern Rock also decided to pull its lifetime mortgages, claiming it will honour existing applications and that terms and conditions for lifetime mortgages currently in place will still apply.
Meanwhile, Newcastle Building Society will close its equity release range by the end of the year and Coventry Building Society made waves when it too decided to suspend new equity release lending. Bristol & West, Retirement Plus and Standard Life Bank - which revealed earlier this month it is to be bought by Barclays - have all followed suit.
While most of the lenders have made it clear they intend to return to the market when the economy picks up you can’t blame brokers for being cautious. Already battling issues such as dual pricing and new legislation, with the Financial Services Authority’s Mortgage Market Review proposing lenders take more control of affordability it would be understandable if intermediaries decided to steer clear of the market for now.
So is equity release the next big thing or will the regulatory risk and the difficulty in acquiring clients be too high a barrier?
A recent survey by Hodge Lifetime shows that IFAs advising on equity release remain confident about the sector. Some 83% say lender withdrawals have not affected their confidence and neither has an earlier Which? report. Only 4% of advisers say that Which? mystery shopping exercises are a concern when advising on equity release products. But despite their confidence advisers still believe much can be done to boost the potential of the sector. When asked to rank their concerns 19% of brokers state that the sector’s negative portrayal in the media remains a worry. This has been consistently ranked as the top IFA concern over the past year.
Endorsing this concern, 21% say the main catalyst for promoting the growth of the equity release sector would be positive media coverage. But this statistic could be viewed with a degree of cynicism given the negative press coverage of Which?’s recent mystery shop of equity release advisers. The investigation looked at the quality of advice provided by 40 equity release advisers and found that two-thirds were not up to scratch. The study, in which nine undercover researchers were sent out to get advice on equity release, found that only five out of 12 equity release specialists passed the test.
But Jon King, managing director at Hodge Lifetime, says the results of his company’s survey are encouraging.
“While the sector has had to endure the withdrawal of advisers and product providers, as we look towards 2010 brokers are coming forward with ideas for product innovation and offerings which could fuel demand in the sector,” he says.
Part of the reason for this continuing confidence could be that the so-called exodus of lenders does not give a true picture of what’s happening in the market. Despite several lenders leaving, the big players remain. Figures from Moneyfacts show the five biggest equity release providers in 2008 remain unchanged in 2009. Aviva, Hodge Lifetime, LV=, Prudential and Stonehaven still control most of the market.
Peter Welch, head of sales and distribution at Bridgewater Equity Release, says it is interesting to note which lenders have left the market.
“None of the market leaders have left and neither have those that finance their equity release business from their annuity books such as Prudential, Aviva and Just Retirement,” he says.
On top of this, the value of the equity release market has only changed slightly and between Q2 2009 and Q3 the market value actually rose from £233.3m to £236.2m. But the figures are still down on last year - the sector’s value in Q3 2008 was £303.3m.
While it might be thought that these figures could plausibly be explained by the fact that drawdown products are more popular than lump sum deals, this is not the case. Moneyfacts data shows Aviva’s lifestyle lump sum deal was the most popular product both this year and last.
owever, a fall of 22.13% between Q3 2008 and Q3 2009 is hardly unexpected given that the credit crunch has seen the residential mortgage market drop by 36% in the same period.
Dominic Fraser-Smith, group product manager for UK Life at Aviva, says the decline is to be expected and should not be regarded too negatively.
“While the latest figures from Safe Home Income Plans show a fall in absolute customer numbers much of this is due to the fact that some providers have withdrawn from the market or curtailed their activities due to funding issues,” he says.
“But the value of the market rose between Q2 and Q3 this year, as did the amount released per customer. This shows that consumers have more confidence in the housing market returning to normal and therefore feel secure in releasing a larger proportion of their equity. We have seen a steady increase in the number of customers approaching us for equity release and they are currently releasing an average of £45,000.”
But Claire Barker, chairman of the Equity Release Solicitors’ Alliance, says funding is still a big barrier.
“The equity release market has held up well, particularly when compared with the general mortgage market,” she says. “But inevitably there have been issues. In the early part of the recession downvaluations were causing problems. Now we are seeing more issues with lack of funding for providers, which is disappointing as there is clearly still an appetite from home owners for the product.”
Indeed, the delayed reaction to the crunch that the equity release sector is suffering stems from the same problem being felt in the residential market - the drought in funding.
“External commercial funding is almost non-existent, especially in view of the particular risks to equity release providers - namely those of longevity, negative equity risk and the fact that no interest or capital repayments are usually made for a long time,” says Nigel Barlow, head of research at Just Retirement. “But companies that use internal funding and are familiar with the risks are still able to write business securely.”
Although broker confidence remains strong despite the funding issues a question mark still hangs whether equity release is a viable source of profit for intermediaries. Now is not the time for experimental business ventures that may or may not pay off as advisers need income streams that deliver.
Terry Pritchard, managing director of Charterhouse Retirement Services, argues that equity release is still profitable. But he believes those brokers who would only handle a handful of deals per year should consider referring these to specialists and collecting referral fees rather than dealing with the cases themselves.
“A few providers have left the market because of funding issues but I think some will stay in,” he says. “Annuity and pensions-funded firms will survive. For building societies equity release falls under their special provisions - there are more provisions for equity release than prime lending. If you are a small society and you have the FSA on the phone to check you’re covering your provisions, you’re not going to want to get into it.
“Most IFAs only do three or four cases a year and I reckon it would be better for them to refer these clients to specialists.”
Pritchard’s firm is relatively new but he says he got into the market just before such a move became difficult. Charterhouse functions as a packager as well as an equity release club and network.
Of course, brokers looking to get involved in the equity release sector now need to be aware of the amount of work involved.
“Like any business type, equity release requires brokers to prepare properly to offer advice so an investment of time and money will be required,” says King. “For those who make the choice, equity release can be a profitable and consistent contributor to business.”
And for brokers who have been in the market a while equity release has certainly been a money-spinner.
“My average equity release case value is over three times greater than my average ordinary mortgage case,” says Simon Chalk, who offers advice on the Marketing Innovation Forum and is a mortgage and equity release planner at Mortgage Portfolio. “Advising on equity release is profitable as long as you have the right process and fee structure in place. But if brokers try to use their mainstream advising method in the equity release arena they will fail. A different approach is required, with a fee-based model at its heart.”
But a recent poll by Mortgage Strategy found 47% of brokers were against charging fees so do those involved in equity release feel comfortable charging them? According to Pritchard it’s not so much a choice as a necessity.
“There needs to be some sort of fee-based model because the proc fee is low for the amount of work required,” he says. “Every adviser I know charges fees. The workload is twice as much as for residential mortgages. If you are upfront with customers there shouldn’t be a problem. We have not had anyone challenge the fee. Of course, it has to be reasonable - you have to do right by your client.”
Customer interest in equity release is not a problem and for those lenders that still have funding there is high demand.
“The debate over assets in retirement is expanding to include property wealth and with the baby-boom generation heading for pension age interest is set to rise for the next 15 years,” says King.
And Chalk too believes a recovery is inevitable.
“The future is exciting for equity release,” he says. “It’s a question of when rather than if equity release volumes explode. Every demographic is in our favour. We’ve just got to get past this sticky period and work hard to help consumers and advisers appreciate the benefits of equity release.”
Chalk’s predictions may be optimistic given that in the past five years the market has remained pretty static. But the fact remains that if brokers are willing to approach equity release seriously rather than see it as a quick and easy income stream the market could provide valuable additional business just at the time when they need it most.
Brokers should refer business
Dean Mirfin
group director
Key Retirement Solutions
Equity release can be profitable for brokers but this comes with a substantial caveat. Assuming advisers want to deliver the best possible solutions for clients the infrastructure required bears no relation to the scale of the operation.
Ino other words, whether you are writing one case or 100 there will always be fixed costs which hinder profitability.
ome of these can be absorbed if you are a member of a network, although many networks do not want to take on the compliance risk. So directly authorised advisers need to decide on the services they will offer and the ancillary support mechanisms they will use, for example, with regard to benefits software.
Assuming cost benefit is evident the greatest mistake brokers can make is to underestimate customers. The second stage of the Financial Services Authority’s Mortgage Effectiveness Review reveals that clients taking out equity release do not do so on a whim but after having carried out a considerable amount of research.
The report states that “…if consumers are gathering information from more than one source it may suggest they are actively engaged in shopping around. The findings from our qualitative research suggest consumers in the lifetime mortgage market generally gather lots of information about equity release and lifetime mortgages before going to a broker or lender”.
This indicates that to capture enquiries on any scale advisers must become marketeers. Many of today’s consumers of equity release are still not web-savvy, unlike mainstream mortgage consumers. This means that more expensive routes to market need to be taken. These include press advertising, which is costly if used regularly.
The timescales involved can also make short-term gains difficult. Customers who enquire do not necessarily proceed straight away. This could be because they are planning ahead and have no intention of taking out a product now.
The FSA’s report also finds that the decision to purchase a lifetime mortgage is a lengthy process. Consumers weigh up the benefits and disadvantages of various deals and consult family members before making a decision.
The brokers for whom equity release is viable tend to be those who have good referral connections with peers and other professionals, or indirectly through referrals to specialists. The latter takes out cost and authorisation restrictions as well as risk, and allows them to focus on business they can write on a viable scale.
So equity release revenues are generated through the ability to generate enquiries. Some brokers may try to get these inhouse but for many the margin will never be sufficient to justify writing business themselves.
Good pipeline of business is essential as equity release is a long process
Kevin Friend
strategic partnerships director
Mortgages.co.uk
Around 7,000 brokers are qualified to give advice on equity release transactions, but clearly this figure bears no relation to the number who actually complete equity release business or possibly even understand the sector. A recent Which? report states that “pensioners struggling to make ends meet should only turn to schemes allowing them to release value from their homes as a last resort”.
The report highlights the need for advice to be given by a specialist who has years of experience and the appropriate processes and infrastructure in place to support the business. Indeed, part-time or inexperienced brokers providing advice have arguably led to the demise of the specialist lending sector in recent years.
A number of lenders have left the equity release market recently but to put this in perspective those that left were not responsible for volume lending and there is still ample product choice from those still committed to the sector. Inevitably, we will see new entrants being attracted as the market improves but they will be attracted to proven advice providers rather than individual brokers.
Brokers who do not specialise in equity release are likely to be unaware of the amount of work the process demands and appropriate fee-charging is key to profitability. This is where experience is particularly important. Selling equity release can be an emotive and long process so a good pipeline of business is essential. It is clear that there’s a profitable business model for the fulfillment of equity release but this depends on factors such as cost of client acquisition and the infrastructure to support the business.
Brokers who are not experienced in selling equity release should consider referring clients to specialist companies and accept the referral fees paid on completion. It is inevitable that the equity release sector will grow as the need for cash to support shortfalls in pensions hits the elderly in particular.
Children will prioritise their parents’ quality of life to the detriment of their inheritance but it’s not always easy for the elderly to commit to using equity built up over years to subsidise or improve their lifestyle. This may change with future generations.
The Pensions Policy Institute has recently stated that housing wealth can be an insurance against poverty in retirement. Some 50% of the working population are members of a pension scheme and own a house, while 22% own a house but do not have a pension. This alone shows the potential of the sector.
Falling house prices hit demand
David Cooper
marketing and
distribution director
Just Retirement
The credit crunch has had some impact on the equity release mortgage markets but this bears little resemblance to that felt by the residential mortgage market. We have seen overall demand fall marginally as consumers have tried to make sense of the rapidly changing financial and economic situation.
This has resulted in a small number of potential equity release customers backing away, particularly those seeking to release monies for less than essential purchases such as home improvements and travel.
A higher number have been affected by falling property values. Those who wanted or needed to withdraw the maximum for their given age may have struggled to be accepted for equity release mortgages due to declining property valuations. A growing number of retirees are using part of their equity release money to repay existing mortgages and debts. Where the maximum advance can’t cover, say, an existing first charge on a property, it may not be possible to proceed.
These groups make up the majority of the decline seen recently in the equity release market.
On the other hand, the high number of providers withdrawing from the market during 2009 is to do with the availability of long-term funding to advance equity release mortgages.
Some of these withdrawals have been the result of providers collapsing - Northern Rock and Mortgage Express perhaps being the best known names in this regard. At their peak these two lenders commanded virtually half of all new equity release advances. But smaller lenders have also found themselves in a similar situation, such as Dunfermline Building Society.
And a number of other lenders have probably withdrawn for similar reasons - namely that retail deposits and short-term funding is not appropriate for long-term guaranteed rate lending. We have therefore seen the withdrawal of Coventry Building Society subsidiary Godiva, Saffron Building Society, Bristol & West, Retirement Plus and Standard Life Bank.
Another reason for some providers withdrawing is that they previously secured their funding from third parties. In Retirement Services and Partnership both took this approach and when their funders reviewed their exposure to long-term equity release mortgages then they had to pull their offerings.
Meanwhile, equity release continues to be used for a variety of purposes during the crunch. We have seen a recent increase in the use of funds to repay debts - a trend that seems likely to continue as more mortgages reach their terms with insufficient funds to repay them. And the growing prevalence of unsecured debt will no doubt be a similar driver.
If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat
