Cover feature: Lifetime opportunity

The broken wall

Given the vast number of borrowers on interest-only mortgages, could increased awareness of equity release by advisers, consumers and mainstream lenders transport the sector to new heights?

Equity release is being hailed as the potential saviour of thousands of borrowers who are reaching the end of their interest-only mortgage, so is the market finally about to come of age?

Santander gave the sector its seal of approval in July in a landmark deal with Legal & General and Key Retirement to offer its borrowers lifetime mortgages. This, as well as proposals from the regulator to create a standalone exam for advisers, is pushing equity release out of the shadows and into the spotlight.

Redeeming features

There were around 1.7 million pure interest-only mortgages outstanding at the end of 2015, according to the Council of Mortgage Lenders, with a further 500,000 existing on a part interest-only, part-repayment basis.

Key Retirement group director Dean Mirfin believes equity release can assist a number of these borrowers who have no repayment vehicle in place.

“The Santander deal is a recognition that, for older borrowers, equity release must feature more when addressing the interest-only issue,” he says.

“We can question why lenders aren’t lending to borrowers in retirement but actually a lot of older borrowers shouldn’t be lent to once they have retired because of affordability issues, so lenders do need other solutions.”

According to Key Retirement’s Equity Release Market Monitor, close to a quarter – 22 per cent – of equity release borrowers used the facility to repay an existing mortgage in the first half of 2016, compared to 17 per cent for the same period in 2010.

“It is the only usage area showing any significant change and we are in only the first wave of those reaching maturity on their interest-only deals,” says Mirfin.

Under the Santander deal, if all of a borrower’s options have been exhausted through the lender, they will be referred to L&G Home Finance. If its products are also deemed unsuitable, the client will be passed to Key Retirement and its whole-of-market panel. The arrangement has no commercial benefit for Santander.

Recent research undertaken for mutual OneFamily by the Centre for Economics & Business Research estimates that around one million interest-only mortgages will mature between 2016 and 2025, with a cumulative value of around £110bn. It has warned that borrowers face a shortfall of around £6bn.

With talk increasing about an ‘interest-only time-bomb’, Bower Retirement chief corporate officer Andrea Rozario believes the market is likely to see more associations like that of Santander. However, she stresses the importance of advice.

“What is really needed is independent advice so that all options are explored,” she says. “It is necessary that each situation is looked at separately to assess the individual needs of the customer and to ensure they are fully informed of all their choices.”

L&G Home Finance chief executive Bernie Hickman also thinks Santander has set a trend.

“We expect many other lenders to make lifetime mortgages available to their customers,” he says, “especially as an option for those at the end of their mortgage term to repay the capital amount outstanding.

“The proportion that have released equity is a tiny fraction of the proportion that could, so the market is likely to continue growing at a fast pace,” he says.

The insurance giant, which bought equity release provider New Life Home Finance in February 2015, recently announced that sales of its lifetime mortgages were on track to exceed £500m in 2016.

Mirfin thinks new entrants to the market will be led by either their interest-only strategy or a general desire to offer equity release to customers. In a recent interview with The Times, Nationwide revealed it was looking to create an equity release proposition.

However, Mirfin thinks few lenders will be tempted to offer their own standalone equity release products.

“All of the big banks are lending in a world where there is cashflow coming back in,” he says. “Therefore, to a mainstream lender, undertaking equity release doesn’t necessarily fit. It’s not that they don’t want to do it; it just doesn’t fit their business model.”

Product innovation

According to the CML, at the end of 2015 there were 327,000 interest-only borrowers with an LTV of over 75 per cent and 497,000 with an LTV of 50-75 per cent – the latter representing almost half of all outstanding loans. So can a sector where the highest LTV is only around 55 per cent be of any use to interest-only customers?

“The challenge is that, for half of the people on interest-only loans, lifetime products can’t help because their existing LTVs are too high,” says Mirfin.

“With the highest LTV currently 55 per cent, a borrower would have to be in their 80s to get it.”

He adds: “The market will need different products. For a pure roll-up product you can’t go any higher if you are going to offer a no-negative equity guarantee.”

The FCA dealt the sector a helping hand in April when it announced it would allow lenders to skip affordability tests for borrowers on interest-charging loans that could be converted into roll-up loans, due to there being no risk of arrears or repossession in the event of missed payments.

Mirfin thinks the move by the regulator will lead to increased innovation.

He says: “There are a lot of older borrowers in the lead-up to retirement who can afford to make the interest payments on the loan but not when they reach 65 or retire, at which point the loan could be converted into a roll-up.

“The FCA’s ruling will result in more inno­vation in this area, enabling customers to borrow in a way they want to,” he says.

Age Partnership corporate partnership manager Tom Moloney says client demands have led to the creation of more hybrid products in the sector.

“A requirement to release larger lump sums regularly means the client’s requirements can exceed what is available on traditional products,” he says. “This has led to the development of the hybrid or retirement mortgage offering, which bases lending on affordability rather than on age or property value, often allowing clients access to more funds than are available through a traditional lifetime mortgage.

“These products are new and require devel­opment to improve access and suitability, but they will play an important role in our industry,” he says.

Product pricing has already developed. The average loan of £76,300 was 5.19 per cent a year ago, on 13 September 2015, whereas the best annual interest rate on 13 September this year was 3.78 per cent. The market is experiencing some of the lowest rates it has ever seen.

Mirfin says the strongest funders for equity release are using their annuity and pension scheme books to shore up their equity release borrowing.

“They are matching long-term assets by generating a return from another long-term asset,” he says.

Investor appetite for equity release also comes from the comparison with returns from alternative forms of investment, such as gilts and bonds, which are performing less well.

New qualification

So what can be done to grow the sector further? The FCA believes the key could be a new exam.

The regulator is considering a standalone equity release qualification for advisers, or a topping-up of an existing pensions or investment qualification. It believes some advisers are currently deterred from offering equity release because they must first sit a mortgage exam.

Hickman says that, while a standalone exam may encourage more non-mortgage advisers to advise on lifetime mortgages, it is also important that advisers are qualified to consider all suitable alternatives, some of which may be residential mortgage products.

“Many advisers already hold the qualification to advise on lifetime mortgages, so it would be good to see them become more active in providing advice to more of their clients,” he says.

Association of Mortgage Intermediaries chief executive Robert Sinclair agrees, noting that around 8,000 advisers already have the equity release qualification, some of whom are not using their skills.

“Consumers should be thinking about more than just equity release and there is a range of flexible products on the market that a broader mortgage adviser would be able to talk about,”  he says.

Sinclair suggests a better option would be for firms to work alongside a mortgage adviser with an equity release qualification, rather than simply broaden a pension adviser’s scope.

Rozario says the requirement to obtain mortgage qualifications before the equity release exam has always been a sticking point because the advice process is vastly different from that for normal mainstream mortgages.

“It is not simply a case of finding the best interest rate. A number of factors need to be considered, not least entitlement to state ben­efits, other viable options, family involvement, etcetera,” she says.

“Often the process is more akin to that of a financial adviser as opposed to a mortgage broker. While the products are essentially mortgages, there are myriad features that are often more important than the rate alone.

“For many financial advisers who do not want to deal in mainstream mortgages, the requirement to have the qualifications is an obstacle to prac­tising in the equity release arena. For this reason a standalone qualification makes sense.”

Golden future?

Given the rates, the appetite from lenders and a wider recognition of the benefits of the sector, arguably the equity release market has never been in a better position.

Those reaching the end of an interest-only deal will assist the sector’s growth. However, without higher LTVs from lenders, this will not be revolutionary.

There are around 8,000 advisers qualified to offer equity release and they must also play a part in expanding its reach. Unlike borrowers seeking a mortgage or loan, a potential equity release client may not come knocking on a financial adviser’s door but instead may need con­vincing of the sector’s attributes.

However, a growing awareness among advisers and a greater presence by mainstream lenders should help the sector enter its golden years.

Maintain momentum 

Nigel Waterson
Chairman, Equity Release Council

The equity release market is experiencing record growth, driven by greater understanding of the potential benefits of housing wealth when planning for retirement, and by an expanding range of products.

waterson-nigel

In H1 2016 a total of £908m was lent by the sector – 28 per cent more than in H1 2015. This is the largest annual increase in the value of lending for more than a decade. The outlook for the second half of the year is positive too, with the prospect of more than £2bn of housing wealth being unlocked in a single year for the first time.

Product innovation has played a huge role in growing the market. Over half of new plans allow customers to make voluntary repayments up to a certain value – typically 10 per cent a year – without facing an early repayment charge. Similarly, more products allow customers to pay off interest as they go before reverting to roll-up, reducing interest costs. Lenders are offering increasingly diverse products to meet a range of borrowers’ needs. For example, downsizing protection keeps options open for borrowers who may want to pay off their loan if their circumstances change.

This growth in product innovation and choice has been driven by both new entrants and established players. Moneyfacts reports current availability of 75 lifetime mortgage equity release deals. This is an increase of63 per cent on a year ago.

For those nearing or already in retirement, housing wealth is often their greatest asset and should be on every homeowner’s radar when planning financially for retirement. However, we must not become complacent with what has been achieved so far. In order for equity release to benefit more consumers, some challenges still need to be overcome.

One such challenge is promotion to the mass market. We must continue to work hard to bring the sector’s benefits to the attention of consumers and increase understanding of equity release.

Empowering more advisers is also hugely important. It is positive to see the FCA paying greater attention to equity release and we look forward to continuing a constructive working relationship with it and with other key stakeholders as this develops.

The industry has a way to go before fulfilling its potential as part of the wider solution to supporting the UK’s ageing population. But its record of innovation and improvement over the past 25 years shows it is more than capable of doing so.

Equity release timeline

1965: The UK equity release sector comes into being. Hodge Lifetime is one of the first providers in the market.

1980s/1990s: The sector suffers reputational damage after an unfortunate combination of high interest rates, poorly performing investments and plummeting property values leaves a lot of elderly borrowers with equity release plans in substantial debt, many of whom ultimately lose their home.

1991: Safe Home Income Plans enters the market. The self-regulatory body launches in direct response to the growing need for consumer protection in the sector. Its members agree to abide by its code of practice, which among other things offers customers a no-negative equity guarantee. Founding members include Allchurches Life, GE Life, Hodge Equity Release and Home & Capital Trust.

1998: Norwich Union – now Aviva – launches into the market with one of the first lifetime mortgages. It is also responsible for the development of one of the first roll-up mortgages.

1998: The increased number of providers leads to a more noticeable presence of adviser firms. Key Retirement launches, known then as Home Income Gold and owned by Countrywide.

Early 2000s: The sector continues to gain a host of new entrants. Building societies are key players, as well as entrants such as Abbey, Prudential, Saga, Scottish Widows, Standard Life and Zurich.

2001: The market is worth £572.2m annually, with around 14,900 plans taken out this year.

2004: Lifetime mortgages become regulated by the Financial Services Authority but the regulator does not include home reversion plans until 2007.

2007/10: The financial crisis hits. Providers such as Coventry, Northern Rock, Prudential, Retirement Plus and Saffron Building Society suspend lending. Prudential’s share of the lifetime market falls from around 23 per cent in 2008 to 12 per cent in 2009.

May 2012: SHIP relaunches as the Equity Release Council, broadening its membership to incorporate all aspects of equity release advice and product provision. The new body represents providers, financial advisers, solicitors, surveyors and other interested parties working in the equity release industry.

2012: The total value of the sector increases by 17 per cent annually, from £788.6m in 2011 to £925.7 this year. Sales via independent financial advisers account for the largest share of the market:91 per cent by value and 88 per cent by volume.

2015: Legal & General acquires New Life Home Finance and launches into the equity release sector. Association of Mortgage Intermediaries chief executive Robert Sinclair estimates the market could be worth a total of £5bn annually by 2020.

2016: Santander teams up with Legal & General and Key Retirement to offer its interest-only borrowers the option of equity release.