The equity release market is on track for a record year and it will only keep growing.
That was the over-arching sentiment among industry figures Mortgage Strategy spoke to, but some worry a shortage of later-life lending expertise among brokers could inhibit that growth.
It may make it harder for consumers to obtain advice on raising money for their later years, particularly when many have little idea of the merits of equity release, retirement interest-only (Rio) mortgages or other options.
However, the data portrays positive signs for the industry. Figures from the Equity Release Council (ERC) show lend-ing in the sector should breach £4bn in 2021, for the first time. At the end of September, £3.46bn had been advanced this year. Even with the inevitable Christ-mas slowdown, the figure should comfortably exceed the next billion-pound milestone at the end of 2021.
Demand is picking up and providers are keen to respond
The number of products has also hit a record high. Figures from data firm Moneyfacts show that in October there were 812 lifetime equity release products — up from 698 in August. Back in August 2016, meanwhile, there were just 88 products.
Going mainstream
Key chief executive Will Hale sums up the optimism among many equity release professionals: “Against the backdrop of a pandemic, the equity release market is on track to potentially even touch £4.5bn by the end of the year.
“This demonstrates how modern products are embedded in the mainstream financial services market, offering low rates and flexible features to address a wide range of needs.
“This year we have seen increasing numbers use equity release to support families and manage their borrowing, and use historically low rates to remortgage existing equity release products.”
Lifetime mortgages will cease to be seen as specialist
Hale adds: “While many plans have been put on hold during the pandemic, we expect the return of people seeking to boost discretionary spending as they look again at how to fund their later-life ambitions.”
Moneyfacts finance expert Rachel Springall adds: “Equity release business is booming and is expected to grow in the years to come.”
Meanwhile, Legal & General Home Finance chief executive Claire Singleton thinks equity release could become far less of a niche product. However, it has some way to go given there was £243bn of standard mortgage lending in 2020, compared to the £4.5bn or so of equity release lending expected in 2021.
Singleton says: “We anticipate lifetime mortgages will cease to be seen as a specialist option and instead become a more standard consideration among other at-retirement products.”
One of the benefits of the equity release advice process is it frequently unearths other solutions
Releasing money for their later years is a complex choice for consumers, which arguably makes the need for good advice more important than for many other financial decisions, especially given how costs can spiral if they get it wrong. The regulator has dictated that borrowers must obtain advice before taking out a lifetime mortgage because of the risks.
However, many claim equity release and other later-life lending options are not fully understood by enough financial advisers to meet demand. Until this gap is bridged, some argue the market may not hit its full potential.
A breakdown of Financial Conduct Authority figures by analyst firm Autus Data Services in the summer found there were 35,000 mortgage advisers but only around 20% of them advised on equity release products.
Stunted growth?
Although Singleton predicts growth for the equity release market, she worries some of that uplift could be stunted: “For brokers to make recommendations that suit individuals’ unique circumstances, we need advisers with the right skills, qualifications and experience.
“That only 20% of mortgage advisers are trained to advise on equity release means a key solution is potentially being left out of financial advice. This is inhibiting the rate at which equity release can become a mainstream product and it must be addressed if we are to offer truly holistic solutions to suit all customer needs.”
There’s a crucial difference in the professional advice standards for Rio mortgages and lifetime mortgages
The skills gap means many clients who go to a mortgage intermediary for help with later-life lending may not get truly holistic advice. The lack of knowledge among some brokers means they may pass their clients to another firm with equity release expertise even if that is not the best outcome for them.
Responsible Life executive chairman Steve Wilkie says: “A traditional mortgage broker would have to refer some older homeowners to a specialist for advice on lifetime mortgages, even though they could not be sure it would be most appropriate.”
Wilkie points out that later-life lend-ing is complicated not only for consumers but also for brokers, and he suggests some may be avoiding the market because of that complexity.
He explains: “An underwriter has to assess many issues such as pension drawdown income as part of affordability, and brokers have to be expert at predicting how these factors may play out for the customer over the life of the loan.
Modern equity release products are embedded in the mainstream financial services market
“Compare this to a traditional mortgage, where lenders apply a simple income multiple based on three months’ payslips, and you can see why brokers tend to avoid these later-life cases due to the specialism, complexity and processing times.”
The ERC also recognises more training is required for intermediaries.
Its chief executive, Jim Boyd, says: “The council invests significant time and resource in educating consumers and advisers through resources such as its competency framework, adviser guide and good-practice guidance.”
Another industry figure who stresses the need for good advisers is Hub Financial Solutions managing director Simon Gray.
He says: “Demand is picking up and providers are keen to meet customer interest. The long-term nature of the decision to release equity and the increasing choice of products underline the importance of high-quality professional advice.”
Product types
Although brokers play a vital role in helping clients decide if equity release is right for them, they also have to recommend the most suitable type of product, given the significant innovation over recent years.
We need advisers with the right skills, qualifications and experience
A few years ago, the ability to take money in tranches rather than in one go was regarded as novel, but drawdown has since become part of the sector’s furniture.
There are other new product types and innovations in the mix, such as lenders medically underwriting clients, and homeowners drawing a monthly income from their property and paying back interest while still living in their home.
Singleton adds: “We anticipate products will continue to evolve to better meet customer requirements, whether inheritance protection or green improvements.”
Equity release is not the only later-life lending product. The other major option is Rio mortgages. However, these are not being talked up in the same way as equity release.
Moneyfacts data shows the availability of Rio mortgages has jumped from just 38 products in February 2019 to 119 products in November 2021. But the three-fold rise is from a low base, and the option represents just 15% of mainstream equity release plans.
Demand is picking up and providers are keen to meet customer interest
In fact, when Responsible Life revealed in November last year that Rio deals accounted for just one in 740 mortgages, it branded them an “outright failure”.
Wilkie adds: “There’s a crucial difference in the professional advice standards for Rio mortgages and lifetime mortgages. Sales of lifetime mortgages must be advised under FCA rules, but that is not the case with Rio mortgages.”
Of course, when a client enters a conversation with an adviser about later-life lending, the intermediary is obliged to help them understand if they need any lending facility at all. Many critics of later-life lending often point to advisers pushing expensive products when other options are available.
Consumer group Which? — a long-time detractor — described equity release schemes in a report in 2015 as “an expensive way to borrow money, even if as a last resort”. It said consumers could have paid more than three times the loan amount after 20 years, drastically reducing the amount they could pass on to loved ones.
Products will continue to evolve to better meet customer requirements, whether inheritance protection or green improvements
While the later-life lending market was beset in the 1990s with horror tales of financial misery, even its sternest critics would likely argue it has come a long way since. Indeed, communications from many major firms and bodies carry important warning messages for consumers.
For example, the ERC’s customer brochure states: “Before taking out an equity release plan or other lending product, check other financial affairs and options.
“You may have other investments, savings or assets, or you may wish to continue some form of paid employment. You could downsize to a smaller property or one of lower value — perhaps by moving to a different part of the UK where house prices are cheaper.
“You may also want to think about renting out a room in your home or taking a loan from family and/or friends.”
Boyd adds: “Unlocking property wealth is not the right choice for everyone, and one of the benefits of the equity release advice process is it frequently unearths other solutions, from savings or investments to unclaimed pensions or benefit entitlements.”
Rate-wise, although equity release costs have fallen in recent years, it is still an expensive product compared to a mainstream mortgage. Moneyfacts says the average equity release rate in October was 4.17%, versus between2.11% and 3.63% for a standard mortgage, depending on the loan-to-value.
The ERC invests significant time and resource in educating consumers and advisers
Meanwhile, what may also inhibit growth is that few big names offer equity release. None of the major high-street banking brands do so, with the most well-known players with a significant foothold being major insurers.
While big names are not always a stamp of quality, consumers often trust known brands more than smaller counterparts and the lack of presence of the banking giants may limit the market.
Yet the mood music within the sector is optimistic. More2Life predicts, in the next decade, the amount of equity released per year could jump to £6.4bn.
Over-optimism?
However, as in many aspects of life, such predictions do not always come true. In early 2019, Hale told Mortgage Strategy he expected the market to achieve close to £5bn of lending by the end of that year, potentially hitting £6bn in 2020.
Brokers tend to avoid later-life cases due to the complexity
He was not a million miles off but the market has yet to reach those levels, although Hale was not alone in such a forecast. Of course, he and others could not have foreseen the pandemic.
Equity release has been described many times as, ‘The next big thing,’ without truly taking off. Although the signs are clearly good for the industry, it remains to be seen whether this is another false dawn or the beginning of a significant growth spurt.
