Few high street names offer it, but the equity release market is growing fast. The industry must keep past mistakes in mind, writes Guy Anker
The equity release market has dramatically increased in size in recent times, and there is little sign of this subsiding. Some predict growth of a further 50 per cent in the next two years.
Lending last year jumped by 29 per cent compared with 2017 and is nearly double the 2016 total. Experts put this expansion down to an increasing elderly population who may not have enough to live on, as well as more product innovation and availability.
However, this growth is from a low base and equity release is far from a mainstream product, with few household names offering it.
The £3.94bn of lending recorded by the Equity Release Council in 2018 compares with £267.5bn for the overall residential mortgage market last year.
Equity release is also a product that comes with huge risk and with a chequered history, with past accusations of mis-selling. It is also expensive for some and can be highly damaging if sold to the wrong person – in fact, consumer group Which? describes equity release as “an expensive lifetime commitment”.
Nevertheless, many market insiders are positive about the current growth, though they accept that both advisers and borrowers should be careful before recommending or taking out a plan.
Exciting times ahead
ERC chairman David Burrowes says: “The market continues to grow as older homeowners realise property wealth can play a crucial role in supporting their retirement alongside pensions, savings and other assets.
“With new entrants and an expanding range of innovative products, this is an exciting time.
“While equity release will not suit everyone, it should be on every homeowner’s checklist when planning their later-life finances. For advisers, it will also be important to take a holistic approach to helping clients navigate later-life financial planning.”
Last year marked the seventh successive year of equity release growth, according to the council.
Its figures show that of the 83,000 who took out an equity release plan, 46,397 were new customers.
Among these completions, approximately two thirds of clients opted to unlock equity from their home gradually via a drawdown plan, with the remainder opting for a lump sum.
Equity release adviser Key says such cash is typically used to fund home improvements, clear debts, pay for big life events or for treats such as holidays.
A tale of demographics
Numerous industry figures Mortgage Strategy spoke with expect this growth pattern to continue, given that many of the fundamental conditions look set to remain – not least that having an ageing population increases demand.
The Office for National Statistics says about 18.2 per cent of the UK population was 65 or older in the middle of 2017, compared with 15.9 per cent in 2007. This is projected to grow to 20.7 per cent by 2027.
“The growing older population has been a driving factor behind the steady rise of equity release,” says Burrowes.
Key chief executive Will Hale thinks the market could grow by another 50 per cent in the next two years. “In 2019, I would see lending nudging closer to £5bn, with potentially £6bn in 2020,” he says.
One of the largest equity release lenders, More 2 Life, says its applications doubled last year to hit more than £1bn in value. It expects its lending total to rise to close to £1.5bn by 2020.
Another reason for likely growth, according to Hale, is that many people are not saving enough for retirement, even with automatic pension enrolment, so many older people will need to find some extra cash.
He says: “The figures simply do not add up, especially when you add in variable costs such as the potential to pay for care or the desire to help younger generations.
“For most people, their home is their largest asset and if they are struggling to afford the retirement they want, it seems madness not to at least consider how housing equity could help.”
While leading industry figures often go out of their way to warn that equity release is not right for everyone, the sector’s critics will likely point to downsizing as an even stronger first consideration before taking out any form of finance plan.
What has helped those who do want to spend some of the equity tied up in their property is a rise in the number of products that are available.
Figures from data analyst Moneyfacts show there were just 40 equity release products in February 2014, rising to 131 in February 2018 and 201 in February 2019 – a five-fold increase in five years.
Remaining fit for purpose
Moneyfacts financial expert Rachel Springall comments: “Lenders have expanded their ranges in response to consumer demand for greater choice.”
The firm says the average overall rate has also dropped in that time, from 6.1 per cent to 5.24 per cent, making plans more affordable. However, the cost of the cheapest fix has risen from 2.99 per cent to 3.55 per cent.
Another growth driver, it is claimed, has been greater product innovation, offering clients different ways to release cash or pay it back.
Gone are the days when homeowners could only take a lump sum, which often meant that they paid more in interest if they did not need the whole lot in one go, given it is charged from the point of drawdown.
Now homeowners can receive regular monthly income and pay interest back monthly.
They can also make voluntary capital repayments free from early repayment charges and can downsize without having to pay back the loan at that point. This has all helped make equity release less expensive than it used to be.
Responsible Life managing director Steve Wilkie says: “The industry has listened to customers by developing a range of products to meet their needs.”
One notable recent product launch was from Saga in October, with the release of its Regular Drawdown Lifetime Mortgage, which allows homeowners to set a monthly income of £200 or higher to draw from their home. It described the launch as the “first of its kind”. However, many want to see further innovation.
Wilkie insists: “New products and technology are crucial to ensure the sector will not only continue to grow, but thrive.”
Meanwhile, Burrowes insists that market growth and product innovation must go hand-in-hand with a continuing focus on consumer protections so the market avoids the abuses that have tarnished its past.
He says: “The council places the utmost importance on ensuring the robust standards are in place to protect consumers and remain fit for purpose. Industry, regulators and government must continue to explore how we can help retirees adopt a more rounded approach to later-life planning.”
Part of that holistic approach is ensuring advisers have full knowledge of the choices available to older borrowers, be that equity release, standard mortgages, downsizing and others.
The role of an adviser is of course not just to recommend the right product but also to ensure equity release or similar plans are suitable at all.
For instance, as Key reports, many people use equity release to pay off debt, but when one form of debt is used to pay off another it creates a new risk if the parties involved do not understand the true cost implications – especially when equity release can mean years of expensive interest rolling up.
As with any growing sector of the mortgage market, many experts think equity release provides a good opportunity for brokers to expand their business.
Given the risks and complex nature of equity release, virtually every lender, broker or commentator to talk about the subject insists that people should receive advice first, which opens the door for mortgage brokers or any type of financial adviser.
One opportunity comes from the fact that brokers who have traded for many years and have kept homeowners on file during that time will naturally have many older clients.
More 2 Life chief executive Dave Harris says: “The vast majority of brokers who have operated for many years have a back book. Equity release is aimed at over-55s and provides brokers with an opportunity to speak to these clients again.”
There are, of course, risks in the expansion of equity release, not least the complete unknown that is Brexit. Meanwhile, some industry insiders worry that consumers’ memories of equity release mis-selling in the 1990s still linger.
How big can equity release get?
Another issue is that few big brands sell equity release, meaning it is not visible to many potential clients and therefore not always understood. For instance, no major banks are members of the ERC.
A further question for the equity release sector is whether the greater availability of residential mortgages into clients’ later years could hinder its growth, given it is also possible to raise extra cash via the latter way.
Building societies, in particular, have loosened maximum age limits on standard mortgages to such an extent that 35 societies now lend into or beyond a borrower’s 80s, up from 18 in 2015, according to the Building Societies Association. Among these, 16 have no upper age limit.
Such standard mortgages often come with lower rates than equity release but without some of the key protections equity release offers, including a no-negative-equity guarantee and guaranteed lifetime tenure in the property.
Later-life mortgage lending also includes the recently resurrected retirement interest-only mortgage – where borrowers make monthly interest payments, with the capital repaid when they die or sell their property.
Hodge Lifetime – one of the earliest providers of equity release – now sells RIO mortgages too, which takes some of the attention away from the former.
Hale insists there is a place for both without denting the popularity of equity release products.
He says: “When RIO mortgages were introduced, some felt they may take customers away from the equity release market. However, the products are actually very different, which means that they appeal to different customers.
“Equity release offers all the flexibilities of RIO and other later-life lending solutions, but some people may need higher LTVs than are available under equity release, or are willing to trade the certainties offered by equity release for a slightly lower starting interest rate.”
Just how big the equity release market can become remains to be seen, though the fundamental demographic and economic conditions appear to support the theory that it can only keep inflating, particularly as its small size means it has plenty of room to grow.
Yet in its current excitement, the market will do well to learn from the mistakes of the past – for the sake of brokers, lenders and borrowers.
Equity release pros
- No negative equity guarantee
- With drawdown, there is flexibility on when to take the cash
- Reduces inheritance tax burden
- Gives client the right to stay in property for life (or till they go into care)
- Fixed or capped interest for life
Equity release cons
- Interest roll-up can make it expensive
- Exit penalties can be huge
- Can hit benefits entitlement
- Less inheritance for next of kin
- Can hurt a client’s ability to move home