While the equity release market has been around for more than thirty years, it is only recently that we have seen the expansion of flexible lending features and low rates that make these modern plans an attractive option for a wide range of older customers.
Even as recently as 2016, advisers only had a range of 66 equity release plans to consider for their customers with an average interest rate of 6.15% and an average maximum loan-to-value of 49%, according to the latest data from financial research company Moneyfacts.
Now there are nearly eight times as many plans with a total of 510 equity release products on the market and average interest rates at 4.07% – having edged up slightly from 3.86% at the end of March.
The average maximum loan-to-value however remains stubbornly at 49%.
Whilst some existing customers may understandably find it frustrating that their plans may be on a higher interest rate and also that they lack some of the flexible features available today, the good news is that in the right circumstances, remortgaging is entirely possible.
Indeed, data from Key’s Full Year 2020 Equity Release Market Monitor report suggests that we have seen a year on year increase in the number of customers choosing to switch from an existing equity release plan.
In 2020, 7% of all equity release transactions involved customers remortgaging – up from 5% in 2019.
Our data from remortgage transactions undertaken in 2020 also shows that, on average, customers achieved rate reductions of 1.7% – the average customer moving from a rate of 5.4% down to 3.7%.
The market evolution is helping
Growth in the number of plans has been dizzying over the past five years as new sources of funding have entered the market focused on stimulating demand from more and different profiles of customers through offering competitive rates and creating innovative ways to access property wealth.
In tandem with the expansion of the equity release market the rest of the later life lending sector is also rapidly evolving and lenders have been developing other options for older customers – now offering access to around 100 retirement interest-only mortgages (RIOs) as well.
In the equity release sector, customers can now opt for products which enable them to service interest and/or make ad hoc capital repayments and they can benefit from features such as downsizing protection or inheritance protection.
The introduction of fixed early redemption charges (ERCs) has also been a significant innovation which is likely to drive more remortgaging as the cost implications of repaying a loan at a specific point in time are very obvious to both customers and advisers.
The range of plans on offer highlights how equity release has evolved into a modern, flexible way for customers to access their property wealth.
Whilst benefiting from lower interest rates is a clear reason for customers to explore remortgaging the added advantage of the enhanced features on new plans means that these products can better evolve with customers as their needs and circumstances change over their lifetime.
The rate gap opportunity
Average rates are currently 2.08% lower than they were just five years ago and despite recent marginal increases are likely to remain low.
However, the average rate (4.07%) doesn’t tell the whole story– the lowest rates are currently around 2.76%.
Remortgaging is of course nothing new – Key has always helped existing customers to explore whether there may be opportunities available to them.
Most specialists will be doing the same – monitoring when their clients may be able to remortgage based on a comprehensive assessment of their likely loan balance and considering the impact of early redemption charges (whether fixed or gilt based).
That said, unfortunately not all customers will be able to benefit. Remortgaging in the equity release market is not as simple as just moving everyone with a higher rate to a lower one with customers sitting back and counting the savings.
The impact of roll-up interest can take LTVs beyond what is available and, in the prevailing interest rate environment, some gilt based ERCs can be significant.
On this note, and as somewhat of an aside, commentators should be careful in labelling gilt-linked ERCs as poor value and questioning their validity moving forward.
Current market conditions mean that charges can be often higher than fixed-rate options but things can change and we may well find in future that the reverse is true.
Fixed ERCs offer the benefit of transparency and simplicity for customers and therefore should be welcomed but this is not to say that gilt based ERCs don’t also have a place.
All of these considerations as well as the fees that some advisers will charge need to be factored into the equation before deciding whether remortgaging is right for a particular customer.
The evolution of the market means more customers will be able to benefit from switching and raising awareness is important.
However, the sector needs to be responsible in our messaging and focus on targeted personalised engagement to drive good outcomes for customers.
Raising unrealistic expectations is counterproductive if we want to highlight how as a sector we are evolving and becoming more akin to the mainstream market.
The crucial factor as always is that customers receive specialist advice and that this advice is highly personalised and takes account of all needs and circumstances – not just rate.
