The downturn has led to considerable change for the equity release market. At first many providers seemed to be insulated from the recession and many mortgage brokers switched to offering equity release advice to compensate for the loss in mortgage business.
But as the recession deepened a number of equity release providers including Retirement Plus, Stonehaven and, most significantly, Prudential withdrew from the market and it soon became clear that the sector was suffering just as much as the rest of the industry.
But equity release has survived previous downturns. Between 1991 and 1995 new equity release business halved in value and it reached a low point in 1993. In comparison the market certainly hasn’t seen that kind of contraction this time round, with new business falling from a high point of £1.26bn to between £800m and £850m per annum.
But what will be the future of equity release? To debate this Mortgage Strategy, in conjunction with Hodge Lifetime, invited a number of key industry professionals to talk about a range of topics based around the theme of where the sector is headed.
Are we likely to see the emergence of niches within the equity release market?
Andrea Rozario: The biggest thing the industry has to recognise is that customers are changing and that’s going to have an impact on the type of product they’re going to want. Flexibility is likely to be the key factor. Although it’s been a turbulent couple of years equity release has become a more mainstream topic, certainly in the retirement arena. Consumers are looking at it in a more accepting way and at how it may help with their retirement planning.
Has the traditional market for equity release disappeared?
Tom Maloney: We are definitely seeing an increase in demand from people with debt. A recent industry report showed a jump from 11% to 30%in the percentage of enquiries for debt consolidation although recent figures on the amount of debt that retirees are carrying probably don’t align with what we’re experiencing. As a charity, what we’re seeing is probably three or four times that figure for debt consolidation.
Mervyn Kohler: Are these individuals at the younger or older end of the retiree spectrum?
Maloney: At the younger end – probably in the 55 to 65 age range. When we analysed our statistics from this year we found that we have three times the number of enquiries from the over-60s than we do from under-25s. So that age group is carrying twice the amount of debt into retirement.
Is this a concern to you at help the aged, Mervyn?
Kohler: Our experience is that many younger retirees who have been accustomed to juggling loans for most of their lives have gone into retirement with an income that isn’t adequate to service the level of debt they’ve become accustomed to.
Maloney: A lot of people in retirement have been borrowing just to service their debts. They get to the stage when they haven’t borrowed to spend for the past five years – they have just been borrowing to reconsolidate. And this problem is bound to come to a head because they can’t get access to any more money.
Claire Barker: This is a generation that is much more comfortable with having credit, shopping around, moving from credit card to credit card, changing rates and mortgages. Then they get to retirement and don’t have the income to service their loans.
Our research shows more clients are using equity release to repay their existing mortgages. But equally they don’t want to compromise their lifestyle in retirement, so while they may need to repay debt, a big reason for doing this is lifestyle.
Is the baby boom generation looking at equity release as a more acceptable tool to use as part of their retirement planning?
Rozario: Absolutely, but I am worried that although baby boomers are more accepting of debt they are not considering what the future might hold. It’s all well and good taking out equity at an earlier age to consolidate debt but they’ve also got to take into account what’s going to happen in the future.
If they are living longer and are likely to need care, and they’ve already used whatever equity they have to consolidate debt, it’s a scary set of circumstances.
Maloney: I was an equity release adviser for a long time before I joined the charity and from my first day I realised that what I knew about debt consolidation could be written on a back of a stamp.
It’s a complicated process and lots of things need to be taken into account before you even look at going down the equity release route for clients. One of our concerns is that we see a lot of customers for whom equity release is not sufficient to solve their problems. Sometimes, it could just add up to 40% to 60% of what they owe. So what we are concerned about is the plan that has to be put in place after they have released equity to manage the remainder of their debt.
What we’d like to see is a more robust process in place, not only to document what we’re doing for clients today but also how we’re going to manage the money left over going forward.
Simon Chalk: One of the requirements in the draft code of practice from the Society of Equity Release Advisers is that in situations where equity release is being used to repay debt clients are referred to appropriate debt management specialists or the Citizens Advice Bureau if the adviser doesn’t have the requisite skills and qualifications themselves.
To my mind, the starting point is to ask customers whether they have spoken to their creditors before they look at releasing equity from their home. I’ve just done a case where we got a £22,500 loan written down to £14,000 with Lloyds TSB, simply due to correspondence going back and forth. That’s the sort of thing we should be looking at as advisers.
Is this generation familiar with buy-to-let and comfortable talking about property values and their properties not as homes but assets?
Chalk: Well, property is an asset class and needs to be considered in the bigger picture along with corporate bonds, cash and equities. Savvy investors will move their assets and allocate them around different classes in varying proportions depending on the risk, their age, their need for income, their tax position and so forth.
That’s exactly how people view buy-to-let, commercial property and collective investment vehicles.
Barker: We have a love affair with property in this country – we love the ownership aspect of it and that’s a barrier to home reversions. They may be the best value product for a particular client in a certain set of circumstances but there’s still the situation whereby the client gets to the end of their mortgage, the deeds come back from the bank and they don’t want to part with them.
The idea of transferring ownership of a property to a third party isn’t appealing and we probably need to bring about a shift in that mindset.
Will provider withdrawals and the decline of marketing budgets affect the sector?
Kohler: The answer is undoubtedly yes because if there’s a shrinking number of providers it changes the public perception of the marketplace.
If there are high profile players that the public recognise as high street names it generates a certain amount of confidence. It may be spurious confidence but it’s confidence nonetheless.
Are the SHIP guarantees offered on products restricting the way they are developed and holding back the market?
Maloney: I think they are. There are one or two products – not just in the UK but in some foreign markets too – that are slightly different in terms of being variable rates or set term fixed rates and we will have to consider these sorts of products sooner rather than later.
For example, in Ireland there is only one lifetime mortgage and customers are offered a 10-year fixed rate. In 10 years’ time they are offered that rate again. Products like this that could be used to encourage growth in the market would be useful.
Also, there is a small mutual up north, Vernon Building Society, which has a lifetime mortgage plan. It’s only available to its own customer base but it has a variable rate. At the moment it’s sitting at 4.9% and there are no set-up or early repayment charges. It’s able to offer these incentives because of what the rate is.
I don’t see any reason why clients should not have an option to look at that type of plans.
King: What about the guarantees, what about the protection, what about where we ended up in the 1980s?
Maloney: As providers you should have a choice whether you put those protections in or not. And if they’re not there it’s an adviser’s responsibility to ensure that their customers know they are choosing one plan against another that may or may not have those features built in.
Jon King: Probably the biggest risk in the current design of products is the interest rate. You’re offering a fixed for life rate for someone aged 55 where the term could well be 40 years. You buy insurance against interest rates moving but if customers redeem, that’s an interest rate risk.
So increased flexibility, such as being on a variable rate product which could then move to a fix, is a lot easier for a product provider because it’s linked to LIBOR and we can fund that easily. That’s a strong argument for going to a variable rate model.
But what about the no-negative equity guarantee?
Chalk: You could arguably remove that for somebody wanting 5% or 10% equity withdrawal in their 60s or 70s because it’s all about risk. If you’ve got someone taking 40% or 50% and they are going to live to a ripe old age it’s bound to represent a far higher risk than someone taking out 5%.
Maloney: Or just price it accordingly – price it as per the guarantees the client wants. If you want a no-negative equity guarantee, pay a little more for it. If you want a fixed rate, pay a little more for it. But for people who don’t want those, give them away.
King: What about the right of tenure?
Chalk: That’s sacrosanct.
King: So there are certain things you wouldn’t throw away.
Chalk: Absolutely, but we’re talking about what we’d like in terms of product development. The sad thing is that we’ve gone backwards in the past two years, with the withdrawal of some providers that had innovative products.
We’re seeing a great change in the industry which was competing not just on rate but product features too. We’ve now lost this. I hope it’s temporary and when the providers return we can have a meaningful discussion about how equity release helps in later life, particularly in providing domiciliary residential care.
Maloney: We know that’s semi-feasible because Retirement Plus had that in its plan, but obviously it wasn’t sustainable.
Rozario: I don’t think it’s a case of throwing away safeguards, it’s more a case of expanding them. At the moment Safe Home Income Plans insists on certain safeguards that have helped to build the reputation of the industry. The question now is – do we need to expand those safeguards to cover a variety of products to allow for innovation?
Latest ship figures show that 80% of business comes via IFas and direct sales don’t rule anymore. Why?
Rozario: While 80% of business is coming from advisers, research we did recently shows that the majority of customers aren’t going to IFAs, they are going online.
So there is a contradiction in that customers are not wanting to use IFAs according to our research but the bulk of our business is coming from IFAs.
Maloney: Who’s marketing online, Andrea? If you go on Google the top three are intermediary-led providers as opposed to direct providers.
Rozario: What we understood from our research is that consumers are reluctant to use advisers, and I think the Association of Independent Financial Advisers has done similar research.
Maloney: So why is it that such a high proportion of consumers are using advisers?
King: Does this suggest that people would do it on an execution-only basis if advice wasn’t compulsory – is that what you are suggesting?
Rozario: No, what I am suggesting is that we don’t know enough about the customers.
Is the internet the battleground of the future?
Maloney: It certainly seems to be that way, with the printed press diminishing rapidly. When we talk to our clients they seem to have made multiple enquiries and the source seems to be online, even for the over-60s.
7,000 advisers passed equity release exams when SHIP made them compulsory. where have they gone?
Chalk: Some 7,000 advisers may have taken the exams but a lot did so because they were there to be taken. I’ve had many conversations with introducers who have the qualification but have never applied for permission from the Financial Services Authority – they just wanted to understand the product. Similarly, many people who advise on equity release take exams on subjects they’re not going to specialise in such as long-term care, but they want the qualification or an in-depth understanding of the interaction between the two. So the 7,000 number is misleading.
I’d love to know how many advisers are active in the sector but nobody seems to know. My guess is that well under a 1,000 individuals write business in any 12-month period.
Is it time for intermediaries to be represented by a body of their own – a SHIP for IFAs?
Chalk: It’s long overdue and with SERA, that’s what we’re trying to do. But we don’t want to be all-encompassing. As a body we’re trying to find those who want to raise the stakes because the Which? report last year horrified me. Anyone who wasn’t horrified by it should not be advising.
I don’t think what the report revealed necessarily applies across the board but if it does we need to do something about it, and sharpish.
We need to improve the standard and breadth of advice so it’s not only focussed on rates, fees and products but also on other aspects of equity release that should be considered in later life.