‘The cost-of-living crisis’ has quickly become a cliché — but for good reason. It is likely that many people will struggle to uphold their standard of living for the next couple of years at least.
Perhaps it is no coincidence that, earlier this year, Canada Life published data that showed 20% of equity release clients had borrowed in the first half of 2022 to support day-to-day living costs — up from just over 18% in 2019 and after having seen dramatic dips in the intervening years.
With Nationwide showing that, even with growth slowing, house prices still rose 9.5% in September — representing tens of thousands of pounds for many homeowners — Mortgage Strategy went on a mission to see if current events had spiked interest in equity release and, if so, what brokers — and their clients —should be mindful of.
“Our most recent market statistics reveal strong growth, albeit not at an unusual level compared to pre-pandemic trends,” says Equity Release Council chief executive Jim Boyd.
“The first six months of the year saw almost 50,000 new or returning customers using equity release products… an increase of 28% year on year.”
Meanwhile, StepChange Financial Solutions manager Andrew Kerry says business levels are up more than 20% on 2021, “for a mixture of reasons, of which the cost-of-living crisis will be one”.
From the lending side, LiveMore Capital chief executive Leon Diamond says his firm has seen a rise in demand. He proffers that this “will continue to grow as the cost of living increases and there is an increasing impact on pensions due to market turmoil”.
On the subject of whether equity release is a sensible option in these circumstances, Kerry says: “While for some people equity release might be an appropriate way to deal with cashflow pressure arising from the cost-of-living crisis, it is a long-term product and needs to be looked at with the future as well as the present in mind.”
He says brokers should explore any expenses that can be reduced and whether debt “is the driver of the desire to explore equity release”.
Kerry adds: “The broker should also look at maximising the client’s income by completing a full benefits check to ensure the client is receiving all the support they are eligible for.
“Other considerations to encourage the client to think about might include it being more sensible to downsize, or if there are alternative employment options, such as returning to work if retired.”
Revolution Finance Brokers founder Almas Uddin says that, while he has noticed more interest in equity release, “this isn’t as a result of the cost-of-living crisis, but for mortgage repayments, home improvements and to fix in current rates to hedge against further increases”.
He explains: “The vast majority of lenders will only lend money for a specific reason, such as home improvements, debt consolidation or the purchase of another home. The increasing cost of living won’t qualify as a valid reason as this would deem you a client in distress.”
On this theme, when asked if the Financial Conduct Authority’s recent moves on the Consumer Duty will have any impact on recommending equity release, Uddin says: “No, because lending is always based on affordability, while the Consumer Duty principles are aimed at improved communication and support for the consumer, as well as better-value products.”
Diamond says: “The new duties should make firms consider all options for customers. In particular, serviced interest options and affordability should always be considered before proceeding down the equity release path. So, for example, where people need to release capital, a long-term interest-only mortgage where they pay the interest each month can cost so much less in the long term.”
He continues: “Recent work from the FCA and its practitioner panel have highlighted that firms often just encourage older people to take out an equity release loan without considering all the other options.
“Throw into the mix the remuneration bias, as equity release pays eight times as much commission as other mortgages, and it is clear that this will be an area that will attract increased scrutiny.”
Just Mortgages national operations director John Phillips comments: “Especially in times like this, brokers have a duty of care to ensure they fully understand the demands and needs of their customers. In a cost-of-living crisis with interest rates only going in one direction, firms also need to recognise if consumers fall into the ‘vulnerable’ category and actively monitor any characteristics or scope for potential harm and coercion.”
Speaking of wider risks, while Boyd says the ‘no negative equity’ guarantee protects borrowers, and lenders “have robust plans to adjust to once-in-200-year scenarios, such as house prices dropping significantly and never recovering”, Diamond thinks falling house prices could reduce product LTVs.
He also says that, if prices fall, “there is a risk that future drawdown requests are not met by the equity release provider”, adding: “This has been a concern in the market as we believe some customers may believe it’s a guaranteed drawdown and may be relying on these additional funds.”
Kerry concludes: “New equity release customers will need to better understand the impact of compound interest which, together with stagnant or falling property values, will erode the equity within their property, meaning their long-term aspirations and plans may be affected, especially such as plans for inheritance.”
