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Equity release market still constrained

There have been plenty of column inches devoted to equity release products over the last five years. The market seems to have great potential, which remains largely unrealised. The barriers to its growth have been far more significant than many predicted, with lenders and borrowers remaining cautious.

It is assumed that, over time, these barriers will be overcome. But how, when and by whom remain difficult questions.

The last two years have seen disappointing market growth. After more than doubling in terms of new business to over 1.1bn between 2001 and 2003, the market slowed dramatically in 2004 and has stagnated in 2005. Meanwhile, the recent Turner Report into pension provision glossed over equity release schemes, offering little government assistance. However, the market’s potential remains. After all, it is estimated by the Actuaries Profession that 45% of the retired population are home owners but have an inadequate retirement income. The same group predicts substantial growth over the next 10 years.

What are the barriers to this market flourishing? On the consumer side, the attitude towards equity release schemes remains cautious. There have been market abuses in the past, while consumers are fearful of being ripped off and ending up in negative equity. In many ways, consumers are right to be cautious. The range of products is complex, there is much fine print to read, and products are still relatively expensive. A recent Financial Services Authority survey found advice from financial advisors on equity release products to be deficient, while home reversion schemes are unregulated.

On the producer side, major lenders are cautious about the risks involved, particularly mortality risk. If a borrower passes away earlier or later than predicted, the lender’s revenue can be substantially reduced. Lenders also expose themselves to the risks from house price fluctuations.

But there are signs these barriers might be overcome. The FSA intends to start regulating home reversion schemes, though this unlikely to start for another two years. Meanwhile, surveys show younger members of the population are more willing to consider equity release. On the supply side, more providers are entering the market, which is forcing interest rates down. According to Economic Lifestyle, the average interest rate has fallen from 7.05% to 6.87% over the last year.

However, the market is only likely to flourish once more mainstream mortgage lenders become involved. They have the ability to drive rates down further and the reputation to reassure borrowers. Analysts are right to say this market has great potential, but realising this could take longer than most are predicting.

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