Sales are increasing but equity release remains a small fragment of the overall mortgage market. Will the growth continue or is it destined to remain a niche product forever?
Equity release is the Marmite of the financial services world. Brokers and customers either love it or loathe it.
Devotees will point to growing interest in the product; sales topped £2bn for the first time during 2016, according to the Equity Release Council.
Others say this represents a fraction of the potential market and they claim interest rates charged are simply too high.
However, with more people than ever needing lending solutions in retirement, is equity release something we must all learn to love?
It’s hard to start a conversation about equity release without immediately dealing with the negatives, the biggest of which is the reputation the product has developed.
While the Home Income Plan misselling scandals of the 1980s are thankfully long gone, there remains a stigma around the product – for both customers and advisers.
“Brokers have good memories when it comes to things like this,” says London Money director Martin Stewart. “‘Once bitten, twice shy’ is probably the best way to look at it.
“There are some historical negative anchors with the product that may no longer be true, so there needs to be some industry-led involvement to get brokers engaged.”
The ERC was created in 2012 to address these issues and it has undoubtedly improved the perception of the product among the wider public. Its members must meet standards and abide by the rules set out by the trade body – so why aren’t more consumers interested?
“The majority of over-55s are ‘aware’ of equity release, but often they have unfavourable and wrongful preconceived ideas about what it actually is,” says Age Partnership technical manager of equity release Simon Chalk.
“We must strive to increase awareness of the inherent benefits and terrific value that modern plans have to offer.”
Although high interest rates have always been cited as an issue for borrowers, average rates are falling. The ERC says the average rate charged in May 2017 was 5.35 per cent but the rolled-up interest charged on many products remains a big drawback for consumers.
Lenders that belong to the ERC now offer a ‘no negative equity’ guarantee, but the amount owed by a borrower can quickly mount up.
Nobody likes the idea of their wealth being whittled away. Take Prime Minister Theresa May’s disastrous proposals for social care funding in the recent Conservative Party manifesto: her plan could easily have been described as state-backed equity release, but it was hastily changed after a public backlash.
Andy Wilson Financial Services adviser Andy Wilson thinks that, although rates are high, they should not be compared to those of high-street mortgages.
“Lifetime mortgage interest rates are based on long-term borrowing costs and are not comparable with the mainstream markets, where mortgage products tend to be short-lived – just a few years,” he says.
“In my experience, the interest rate charged is rarely a deciding factor for clients who wish to take out an equity release plan. Their decisions are driven more by a need for some additional money, whatever that may be. Even so, equity release rates below 4 per cent are becoming more common.”
But Stewart believes that the rates charged remain a “huge” problem for consumers.
He says: “In a society that knows the price of everything yet the value of nothing, the costs of entering, let alone exiting, the product are going to be of paramount concern to the consumer – and, by default, the children of the consumer.”
Growing the market
The lack of providers is also cited as a problem the sector must face. The market contains big insurance firms but no major banks currently offer equity release. Even so, Chalk argues there are enough big names in the sector to convince borrowers of its reputation.
“In Aviva and Legal & General, the sector already has two of the most familiar UK brands,” he says. “With dwindling high-street branches of mainstream lenders, I don’t believe the absence of more big names as loan originators to be an issue at all.”
Chalk points to the recent link-up between Yorkshire Building Society and Age Partnership as a way of guiding customers from high-street lender to specialist provider. Under this deal, the mutual will refer suitable customers to Age Partnership rather than offer its own range to clients.
But Stewart maintains that new lenders are needed if equity release is to reach the next level.
“In some ways I can’t understand why mainstream lenders aren’t embracing it,” he says. “At a time of benign returns on cash, if I were a chief executive of a bank I’d be looking at all opportunities where I could deploy capital for a better return.
“From my perspective, we need a product that looks more like a first charge mortgage but has the features of an equity release one. It needs the high-street lenders to come in and create that.”
Perhaps it is the broker community that should be driving interest in equity release.
Homeowners who have maturing interest-only mortgages are set to be a growing customer base for the product in the coming years, many of whom will look towards mortgage brokers for solutions rather than retirement specialists.
Whether mortgage brokers are the best people to advise on equity release is another issue altogether. The Financial Conduct Authority previously launched a consultation on whether equity release advisers should require a separate qualification, but dropped plans in May 2017.
The ERC was in favour of the regulator’s decision, saying the equity release and residential mortgage markets should be brought closer together rather than further apart.
But Chalk thinks this was a missed opportunity, saying that a separate qualification would have boosted the number of advisers offering products.
“This was a huge missed opportunity, stifling the much needed increase in number of advisers able to cover equity release,” he says.
“The product sits squarely within the retirement adviser role and not the mortgage broker role because the great majority of clients taking up a plan have no ability or desire to service the debt during their lifetime. Rather they use their property wealth to augment pension and investment income, often by rescheduling serviceable debt into non-serviceable.”
However, Wilson feels that equity release fits well into his business and that mortgage brokers not advising on equity release are missing a trick.
“I am seeing clients who have maturing interest-only mortgages almost every week,” he says. “There is no doubt in my mind that this is going to be one of the most significant growth areas for equity release in forthcoming years.”
Commission rates are also much higher than in the residential market. Wilson says typical commission on equity release products is around 2 per cent, compared to 0.4 per cent for residential mortgages from mainstream providers. However, the case preparation process generally takes much longer than for a residential deal.
The scene seems set for a boom in the equity release market, but that has been the case for years. Greater product development is sorely needed if equity release is to fulfil its potential.
Even fans of the product do not deny there are improvements that should be made.
Wilson says face-to-face advice should become the industry standard.
“I would put an end to telephone-based advice,” he says. “You can sell car insurance over the phone but can you safely sell what is probably the last and biggest financial product of an applicant’s life? I am not sure this can be done entirely safely.”
He adds: “The personal face-to-face advice process ensures I really get to understand my clients’ full situation, and we can bond over a cup of tea, putting them at ease and enabling them to tell me soft facts about their life, hopes, fears and aspirations that are relevant but which may not be picked up by the impersonal use of the phone.”
All agree there is a need for more creativity in the sector.
“I’d love to see a genuine regular income-delivering plan,” says Chalk.
“I’ve been banging on about this for years, and remain hopeful that the eggheads in product design will conjure something up, because by golly is it needed.
“Pension freedoms have brought this quest for sustainable income to the fore and the escalating private domiciliary care market is crying out for something that meets a great regular expense.”
Stewart adds: “Let’s see some real out-of-the-box thinking on products that actually resemble what our clients look like today – forward thinking, flexible and individually unique.”
Stage is set for further growth
Equity Release Council
The UK is in the midst of a retirement income crisis. People are living for longer and inadequate pension savings through defined contribution schemes are likely to leave millions of workers with severe reductions in income when they retire.
Against this backdrop, housing wealth has reached record levels. Total homeowner equity in England reached £2.6tn in 2016, of which £1.8tn belonged to households with a homeowner aged 55 or over – a figure expected to double by 2036. In this context, equity release is an increasingly attractive option, becoming the fastest-growing segment of the mortgage market in 2016, with lending surpassing £2bn for the first time. Yet, given the demographic and economic change afoot, this growth may be only the tip of the iceberg.
Nevertheless, in order to fulfil its potential in the coming years, the market needs to consider five key themes:
- A change in attitude: Outright homeownership still carries a high level of status and pride, and a lingering stigma remains attached to debt. This stigma results in a reluctance from consumers to release housing equity, even when it may be the best financial solution for them.
- Maintaining robust standards: The public’s vastly improved perception of equity release has not happened by accident; rather, it has been driven by the introduction of robust standards, such as the ‘no negative equity’ guarantee. These both protect and reassure consumers. While also being conscious of the need for product innovation, maintaining such safeguards is essential if equity release is to build on the trust it has worked so hard to achieve.
- Advice: Although the expansion of freedom and choice in pensions provides retirees with new opportunities, it has also further complicated an already complex range of options available to consumers. Therefore, to ensure the best outcomes, advisers will require a more holistic level of knowledge of products and services related to retirement income and assets, or must be able to signpost to other experts at an early stage.
- Soft skills: There is also a need to improve the training of ‘soft skills’ during the advice process. Greater emphasis on soft skills supports a positive relationship in which consumers feel able to ask questions and reflect upon the advice they have received.
- Marketplace and innovation: The final piece of the puzzle is the continued addition of new lenders to the marketplace. More competition not only forces rates down but encourages product innovation in a bid to attract new types of consumer. We have seen the results of this already, with average rates falling to a record low of 5.35 per cent in May this year.
As for innovation, recent product developments – such as downsizing protection and voluntary repayments without early redemption charges – are examples of the sector responding to changing market demands.
At a time when many of the old rules of retirement are being ripped up, it is clear equity release has become increasingly relevant. As the market moves forward, it is set to play a crucial role in solving the retirement income conundrum.