Equity release has improved but has a long way to go
Ryan Bembridge (pictured) is news editor at Mortgage Introducer
Equity release has been the biggest growth area of the mortgage market in the past few years. Homeowners withdrew over £3bn of equity from their properties in 2017 using mainly lifetime mortgages – and industry sources expect borrowing to jump past £4bn in 2018. It shouldn’t come as too big a shock – house prices have risen faster than incomes and there’s an increasingly aging population sitting on substantial property wealth.
The industry’s growth has been enhanced by a few factors.
Big name entrants have improved its reputation and driven down rates. Legal & General purchased equity release provider New Life Home Finance in April 2015 and rebranded it to Legal & General Home Finance. And this year the industry welcomed another big name in Canada Life, which purchased Retirement Advantage in August 2017 and was rebranded to Canada Life UK this October.
There’s also the role of industry trade body the Equity Release Council, which originally launched in 1991 as Safe Home Income Plans. The body has 180 member firms, covering the vast majority of the market, and insists providers maintain high standards. People taking out a lifetime mortgage have the right to live in the home for as long as they want, while they must have a ‘no negative equity guarantee’, which means the loan’s value can’t swell to a higher level than the value of their home.
This has helped repair some of the legacy issues of later life lending, which still linger. One tainted product is ‘shared appreciation mortgages’, also known as SAMS, which were sold in the 80s and 90s. Lenders typically gave borrowers 25% of the value of their property as a loan in return for 75% of its future increase in value – and owing to the rapid increases in house prices ever since debts have spiralled out of control for some older homeowners.
There are also problems with some of the equity release products sold this decade. Rates have rapidly fallen from 8% to 5% in a handful of years, but the punitive nature of some early repayment charges mean older homeowners can’t remortgage cheaply and are stuck paying the higher rate. This is being somewhat remedied with newer equity release products going forward. For example Canada Life offers a lifetime mortgage with 5% ERCs in the first five years, 3% for the next three years and none after that.
Newer products are much improved in other ways too. A number allow borrowers to pay interest, meaning the size of the loan doesn’t rapidly increase, while providers like more 2 life allow homeowners to earmark a portion of the value of their homes in their inheritance. Many who took out an equity release mortgage before these innovations came in got a worse deal.
The industry’s reputation took some damage this year. In August 2018 a report from the Adam Smith Institute think tank, following an investigation with BBC business journalist Howard Mustoe, warned that equity release providers are a ‘ticking time bomb’ and are taking too many risks. Providers were said to be underestimating how much the no negative equity guarantee will cost them in the long-term. The response from the industry has been one of incredulity, with Dean Mirfin, technical director of major equity release brokerage Key, flippantly responding “The only way to 100% mitigate risk is to not lend at all”.
Lastly the industry faces another challenge in the growth of retirement interest-only mortgages, known as RIOs. These count as mainstream residential mortgages after the Financial Conduct Authority changed the rules in March 2018. These are generally more suitable for a borrower that still has income, but the growth of this similar product has made it more challenging to offer customers the right one for them. Advisers and providers commonly only have permissions to advise or provide either equity release or RIO mortgages, when really a side-by-side comparison makes most sense to ensure they don’t ‘missell’ and get into trouble later.
So clearly equity release, or more broadly lending into later life, is a market on the up – but there are substantial challenges to overcome for it to continue growing at its current pace.