The liquidity crisis has sunk its teeth into every corner of the mortgage market and the equity release sector is no exception.
Unstable house prices have already made some home owners think twice about unlocking the shrinking equity in their properties and a housing market crash could put them off altogether.
Equity release sales fell 9% in Q4 2007 to £289m, down from £317m in the same period the year before, according to Safe Home Income Plans. This was only slightly lower than the overall drop in gross mortgage lending, which fell by 12%.
The fact that Northern Rock was one of the highest profile providers of equity release deals hasn’t helped either. Nor has October’s investigation into shared appreciation mortgages, a forerunner of equity release, by ITV’s Tonight with Trevor McDonald.
So is the drop in sales just a blip or does it herald darker times ahead? Led by SHIP since 1991, the equity release industry has worked hard to restore its reputation and a repeat of the SAM scandal now seems unlikely.
And Financial Services Authority regulation, which was extended to home reversion plans in April 2007, can only help.
Equity release has steadily grown into a multibillion pound industry. SHIP members representing more than 90% of business in the sector recorded sales of £1.2bn in 2007, up 5% on 2006.
Broker-led sales grew 25% last year, suggesting there’s plenty of scope for them to boost their income from the sector. Indeed, everything looked rosy until that 9% drop in Q4.
Undeniably, the liquidity crisis has hurt equity release but the damage is only temporary, says Nigel Barlow, head of retirement income solutions at Just Retirement. Some customers may have delayed their involvement but the underlying need for equity release isn’t going away.
“If anything, economic uncertainty is making that need stronger,” he adds. “More consumers need to find ways to boost their retirement income and property is a valid solution.”
He says wider choice and flexibility in equity release products will help customers adapt to new housing market conditions.
“If clients are worried about falling house prices, they could choose drawdown plans and only take out money as they need it,” he says. “If prices slip they could draw less income or more when prices recover.”
Drawdown is already proving popular with sales doubling from 6,982 to 13,736 last year, says SHIP. This option is now available on some home reversion schemes as well.
The no negative equity guarantee offered by SHIP members should also help bolster confidence in the market.
“Falling house prices may reduce the equity left for customers’ dependents but they won’t saddle them with debt even in the unlikely event of prices collapsing,” says Barlow.
Indeed, today’s troubles could even accelerate equity release’s evolution.
“We are likely to see the drawdown limit fall below the current minimum level of £10,000 to encourage clients to tap into small amounts of equity,” he adds.
Norwich Union, the highest profile equity release brand, also saw sales dip in Q4 last year although its market share increased.
Group product manager Dominic Fraser-Smith speculates that nervous customers may have gravitated towards a trusted and familiar brand. He remains optimistic about the sector’s prospects too.
“The early signs suggest we aren’t seeing the same fall in sales this year,” he says. “In fact, they are on the up again. Soaraway house price growth has left the over-60s sitting on a massive £841bn of equity – that’s an average of £82,000 each.
“Even if prices fall they would still have an enormous amount of equity. And if the economy goes into recession, more home owners may need to raise money from their properties. So I’m not too concerned about the market.”
Although the amount of cash home owners could withdraw through equity release would fall if property values decline, more sophisticated underwriting and higher LTV products should combat this.
Fraser-Smith is also encouraged by evidence that suggests more brokers are taking the sector seriously.
“Growing numbers are signing up to mortgage clubs to transact equity release or are seeking the necessary qualifications,” he says. “Turbulence in the mainstream mortgage market should encourage more IFAs to seek equity release opportunities.”
His faith is underpinned by figures from SHIP that show broker confidence in equity release remains high, with 41% expecting the sector to grow this year.
But not everyone is convinced. David Hollingworth, mortgage specialist at London & Country, says it considered moving into equity release but decided against it.
“You have to put in a lot of time and effort to do it properly and it’s still a small market,” he says. “And since we mostly offer telephone-based advice, we thought our model wasn’t appropriate so we decided to stick to mainstream deals.”
Kirsty Jackson, head of lifetime mortgages at Mortgage Express, says equity release has been hit by the liquidity crisis but the mainstream market has been hit harder still. While lenders there have been hiking rates and tightening criteria, equity release deals have fallen in price.
“Lenders are refocussing on equity release because they see more opportunities here,” she says. “It’s also a smaller market, which allows them to be more innovative and offer betterrates because they won’t be swamped by thousands of applicants.”
Lenders and brokers are keen to get equity release work to offset losses in their core businesses.
“In February, we produced research showing that eight out of 10 brokers plan to branch into equity release because they recognise its growth potential,” says Jackson. “And one in five said the liquidity crisis was a direct factor in their decision.”
House prices may be slipping but property in the UK isn’t cheap.
“Parents are releasing equity from their homes to fund their children’s first steps onto the property ladder and this is likely to grow,” she says.
Roger Hillier, head of equity release product development at Partnership, which specialises in offering products to those with impaired health, is even more confident that the sector will escape the liquidity crisis relatively unscathed because it works in the opp- osite way to, say, sub-prime.
“Customers aren’t making any repayments,” he says. “The interest is rolled up, which means they can’t get into arrears and their credit history is irrelevant.”
This makes it easier for equity release lenders to secure funding from the money markets at affordable rates.
“With no danger of arrears or overborrowing, the risks are different,” says Hillier.
He adds that the only danger is that property prices will drop so far that lenders have to fund their no negative equity guarantees.
“The risk is minimal because most have given themselves large safety nets,” says Hillier. “And the undersupply of property will prevent a major price slump anyway.”
He says product development will continue to drive demand.
“Customers have more choice than they did seven or eight years ago. They can choose between drawdown or monthly income arrangements.
“And Godiva Mortgages has waived early repayment charges to allow clients to switch to better deals.
“Thanks to competition, the industry is constantly designing new solutions and that’s boosting choice and demand,” he adds.
Current market woes haven’t undermined consumers’ motivation for exploring equity release either.
“Older people still want a holiday, a new car or a stairlift in their homes,” adds Hillier. “Property prices won’t affect that.
“If you are in your 70s you are not going to wait five years for prices to stabilise. You may not be around then.”
Andrew Tully, senior pensions technical manager at Standard Life, believes alternative ways of funding re- tirement such as downsizing will be hit harder by falling house prices.
Moving to a smaller home causes immense disruption financially and emotionally yet boosts consumers’ average pensions by just 16%. Tully says that falling house prices could drag this figure even lower.
“The only clients who can make downsizing work are those who own detached property in London or the South-East and are looking to relocate to a cheaper region,” adds Tully.
Alison Beeston, compliance and communications manager at Bridgewater Equity Release, believes equity release is a long-term business and should be largely unaffected by short-term fluctuations in interest rates and house prices.
And retired clients will arguably be less affected by the liquidity crisis as they tend to have less borrowing but this doesn’t mean they are well off.
“Some are having to choose bet-ween heating and eating despite having plenty of equity in their properties,” she says. “This highlights the need for quality advice and suggests demand will continue to rise.”
With home reversion plans now regulated, customer choice has grown.
“Flexible home reversion products are now available, allowing clients to raise more money by selling off additional portions of their property,” adds Beeston.
“The demographic bulge and demand for products is only going to grow and firms that can commit to the market will benefit.”
So equity release offers plenty of opportunities for brokers to strengthen their business but they must take customer and regulatory responsibilities seriously, she says.
“Clients won’t be well served by brokers who aren’t committed to equity release,” adds Beeston.
“If they’re going to dabble or take a half-hearted approach they would be better off introducing their clients to specialists.”
After home reversion plans became regulated by the FSA, SHIP decided that IFAs and brokers wishing to do business with its members must hold a home reversion qualification. This rule came into force yesterday.
Brokers must apply to the regulator for a variation of permission, which will allow them to offer home reversions and put in place appropriate professional indemnity cover.
Andrea Rozario, director-general of SHIP, says that with several companies offering competitive rates the extra costs should be marginal.
“We aim to ensure the highest standards in the equity release market,” she says. “We urge brokers to ensure they are prepared to advise on home reversions and take advantage of the opportunities presented by this growing sector.”
There are two types of equity re-lease deals – lifetime mortgages and home reversion plans.
If house prices are heading for a fall, does one look more attractive than the other?
Ray Boulger, senior technical manager at John Charcol, says short-term movements in prices shouldn’t affect customers’ decisions.
“If a home owner is taking out an equity release plan in their 60s, they could live for another 20 or 30 years, so price shifts in the first couple of years won’t make much difference,” he says. “But they will over the long term.”
He adds that if borrowers take out home reversion plans and house prices stay fairly flat over the next decade or two, they will do relatively better because they cashed in their share of their property at a time when prices were strong.
But if prices rise steadily, even by as little as 2% or 3% a year, lifetime mortgages could be a better bet, he says.
“Borrowers’ estates will benefit from the rise in property values, which means they should have more money left over after paying off the interest,” says Boulger.
“So if you are as bullish about house price increases over the next few years as I am, this would sway the argument in favour of lifetime mortgages. Of course, there are other factors to take into account too.”
Dean Mirfin, business development director at Key Retirement Solutions, says the equity release industry has worked hard to build customer confidence but it must constantly be on the alert for new threats.
The latest challenge comes from controversial sale-and-rent-back deals, which have been marketing as forms of equity release.
They could confuse customers and potentially tarnish the industry’s hard won reputation.
“Sale-and-rent-back schemes aren’t regulated by the FSA so customers have little protection,” says Mirfin.
Even worse, sharp sales practices have been seen in sale-and-rent-back, with many providers demanding massive rent hikes and conning owner-occupiers out of their equity.
Mirfin hopes the recent launch of the National Association of Sale and Rent Back and its proposed voluntary code of practice will clean up the sector and protect the reputation of equity release as well.
Equity release has been through bad times before, notably after the SAM scandal, only to emerge fitter, stronger and more productive.
The industry remains confident that it can shrug off the prevailing economic woes and assert itself as a successful mainstream product. And bro- kers willing to take the necessary qualifications could benefit from this.
Competition hots up thanks to new entrants
Nigel Hare-Scott is managing director of Home & Capital Advisers It’s reassuring to note that amid the doom and gloom surrounding the mortgage market the equity release sector is bucking the trend.
While the Bank of England reports that the number of mortgage approvals to fund house purchases is falling, the volume and value of equity release transactions has risen by over 5% year-on-year, according to recent figures from SHIP.
Affordability is not a major consideration for equity release providers as no interest is paid on lifetime mortgages. Instead, interest is rolled up on a compound basis until home owners die or move into permanent long-term care.
The sector is looking increasingly attractive to lenders because it offers an opportunity to accrue margins over long periods of time. As a result, new providers are entering the sector and competition is hotting up. This contrasts markedly with the mainstream market where several lenders and packagers have bolted for the exit.
Lifetime mortgage interest rates are tumbling and it’s now possible to get equity release plans at an annual interest rate fixed for life at around 6%. This has to be an excellent deal, more so since some providers will also subsidise products’ set-up costs.
Most of them also offer drawdown options, which minimise the impact of interest. LTVs have been increased over the past year and age criteria relaxed so home owners can consider equity release from the relatively young age of 55.
A major drawback for some brokers has been their reluctance to recommend products with unpredictable ERCs. Although equity release plans are generally designed to last a lifetime, it’s probable that home owners’ circumstances will change over a period as long as 40 years.
But there are now several products on the market that address this issue by having predictable ERCs over a set period of time. Moreover, Godiva Mortgages recently introduced a product with no ERCs and it will be interesting to see how its competitors react.
Despite the turmoil in the housing and mortgage markets, there has never been a better time for home owners to enter into equity release transactions. The sector is intrinsically counter-cyclical. With mortgage funding restricted, we can expect to see a rising number of consumers using equity release to get their children and grandchildren onto the housing ladder.
Equity release offers clients long-term value
Colin Franklin is managing director of Godiva Mortgages The equity release market is entering an interesting stage. The surge in house prices experienced over the past decade coupled with an ageing population and limited pension provision mean equity release is undoubtedly becoming a strong contender for home owners looking to supplement their retirement income. As a result, the sector has been growing steadily.
We entered the equity release market to help pensioners and our offerings include a range of lifetime mortgage products, both drawdown and lump sum. Prior to launch we spent time speaking to equity release brokers who wanted more flexibility from the products on offer.
For this reason, we decided to offer a range of deals without ERCs. They will not only benefit consumers but will also give brokers the flexibility they were after.
But the fact that providers are beginning to offer more attractive products is only the beginning of a range of changes the sector will look to make in the future.
Proc fees are set at much higher levels than standard mortgages, reflecting the commitment and effort required by equity release sales. With growing confidence in the market and the increased availability of compliance and training support, we hope to see more brokers seizing the opportunities the sector offers.
Of course, the equity release industry has been working hard to bolster client confidence over the past decade. SHIP has been striving to safeguard consumers entering the market, and providers and brokers have been looking to convey these messages to the public.
SHIP will play its part in developing the equity release market. It has a big role to play by communicating with the public, brokers and opinion makers to educate them about the benefits equity release offers and the legitimate role such products play in sound financial planning.
Does the equity release sector have a bright future? Some pundits have voiced concerns over the prospect of falling house prices and how this will affect consumers looking at such deals. But lifetime mortgages are long-term products and short-term house price adjustments will not affect them too badly.