Looking at lifetime

Grant Bather

June 10, 2006

At the end of 2005, new business for equity release, and lifetime mortgages in particular, was down on the previous year’s figures. Despite the well-documented latent potential for equity release, this led the industry to question whether the market had plateaued. But so far 2006 appears to have bucked the downward trend. The year started well – some big brand names entered the sector and there are healthy signs for this year’s new business.

Total equity release (reversion and lifetime) new business for direct and intermediary sales in 2004 and 2005 was £1.15bn and £1.05bn respectively. By comparison, the early indicators for 2006 are good. According to the quarter one 2006 figures from Safe Home Income Plans (SHIP), new business stood at £298m, of which £260m was for lifetime mortgages. There are two positive aspects about these figures. First, the value of the lifetime mortgage new business is up on the same quarter in 2005 by 9 per cent, and, just as importantly, the number of cases increased by 16 per cent from 5,151 to 6,000. Secondly, quarter one 2006 has seen a significant rise in the number customers taking out flexible drawdown lifetime mortgages.

The increase in drawdown business is particularly pleasing, because it indicates a rise in the number of providers offering this kind of mortgage. This gives customers an alternative to a single lump sum arrangement. It should also help to minimise the potential for mis-selling. Taking the lifetime mortgage benefit in the form of smaller ad-hoc payments as and when the customer needs the money helps to reduce the burden of rolled-up interest and so should help preserve the customer’s remaining equity for longer. The full impact of the flexible drawdown mortgage will vary by provider and the type of scheme. Advisers will have to carefully analyse terms and conditions covering how long the drawdown money is guaranteed for, the interest rate that is applied to future drawdowns and the cost of having money earmarked for drawdown without actually taking it.

Behind the figures

So, what is happening behind the new business figures? One of the industry’s key dates in 2006 is the day the Financial Services Authority’s (FSA) latest round of mystery shopping results are announced.

The FSA held its first mystery shopping exercise in 2005. The results are well known and have been commented on extensively. They were not satisfactory – in fact, they were worrying. Despite various warnings and the assistance offered to advisers in this market, those tested did not come up to scratch.

At the Council of Mortgage Lender’s (CML) Equity Release Conference on 20 October 2005, an FSA representative summarised the FSA’s take on the 2005 exercise by saying: ‘We came, we saw, we were disappointed and we will return.’

And return it has. The FSA is either nearing the end of its 2006 exercise or has finished it. We can expect this year’s results in July, and there are several signs that they will be an improvement on last year, but the question is, how significant will this improvement be? Signs that we can expect better results include:

  • an increase in the number of flexible drawdown mortgages being sold – which mitigates the risks attached to taking all the benefit in one go.
  • more advisers studying for Chartered Insurance Institute (CII) and the Institute of Financial Services (ifs) versions of the lifetime mortgage exam.
  • A small increase in the number of advisers subscribing to the Fintal software, which assesses the impact equity release benefits have on state benefits.
  • an increase in adviser’s knowledge of the sector. Based on our experience of dealing with advisers at Mortgage Express, they understand the ‘ins and outs’ of lifetime mortgages better.

New market entrants

In March, we saw two newcomers to the market. Both are banks – the Royal Bank of Scotland (RBS) and HSBC have both entered the equity release arena with different business models. RBS has developed its own suite of lifetime mortgage products and will offer them direct to its bank customers, while HSBC has set up a referral service for In Retirement Services, who will advise on and sell equity release products to appropriate customers.

The HSBC strategy is a curious one, as, about a year ago, it bought Nursing Home Fees Agency (NFHA). NHFA is an independent adviser which specialises in advising on equity release and other products typically designed for the over 60s. It will be interesting to see how HSBC’s equity release plans encompass both the NHFA and In Retirement Services, and how these two propositions will dovetail.

Looking at these new entrants, one thing is clear – there are plenty of opportunities for intermediaries offering a whole of market equity release service. While the presence of the RBS and HSBC will enhance the credibility and profile of the equity release market, each of the two banks is offering their customers a restricted service. They will only be offered a suitable solution from a single product provider. On the other hand, intermediaries have the freedom to select the appropriate product, lifetime mortgage or reversion scheme, from all those that are generally available in the mortgage market.

This means the intermediary has a significant advantage over the banks. If they are recommending a lifetime mortgage, they can select the most appropriate from about 15 product providers. This gives choice of maximum loan-to-value, interest rate and further lending terms and conditions, plus many other criteria.


Product design

In the last five or six years the equity release market has seen many significant changes that have benefited intermediaries and customers alike. Recent enhancements include the increase in number of product providers, improved product design and, for lifetime mortgages, competitive fixed rates. FSA regulation and the ‘Treating Customers Fairly’ (TCF) principles mean that customers have ‘never had it so good’. But there is always room for improvement. I think this will come from enhanced product design. Many of today’s product providers are smaller organisations such as New Life and Just Retirement, who have proved that one of their competitive advantages is product design and fast product development.

The adoption of TCF principles by product providers and intermediaries will help mitigate opportunities for mis-selling. However, there is one aspect of the FSA’s current lifetime mortgage regulations that, in my view, needs correcting in order to comply with the spirit of its own principles. This concerns the ‘projected term’ for illustrating the rolled-up lifetime mortgage balance. Currently the maximum projected term is based on the life expectancy for a given age in the FSA-prescribed mortality tables. There are two potentially misleading aspects here. First, the life expectancy term is an ‘average’ for the given age. So, for a customer aged 60, their key facts illustration (KFI) will illustrate their rolled-up mortgage balance in 26 years’ time. In reality, about half of today’s 60 year olds will live longer than this. In some cases, they could live for another 40 years or more. But their KFI will only illustrate the rolled-up mortgage balance for a maximum 26 years. I am concerned that some customers will not receive accurate details illustrating how their mortgage balance will perhaps be double that shown in their KFI, depending on how long they live. Is this treating customers fairly?

The second point is that the prescribed life expectancy tables are a few years old now and should be updated in line with recent life expectancy/mortality experience. For many ages the projected term should be extended. I am not expecting the KFI illustration details to change this year, but I hope we do not have too long to wait.

2005 and early 2006 saw a significant change in fixed interest rates. Five years ago, fixed rates were over 8 per cent, but by quarter one 2006, many product providers had reduced their rates to less than 6 per cent. In turn, this has led to a significant reduction in customers’ rolled-up mortgage balances. The rapid fall in prices was due to two factors – supply versus demand and increased competition, and the reduction in money market rates.

In the last few weeks we have seen a rise in money market rates – and several product providers have had to increase their fixed rates to reflect the higher cost of money. I think we will see fixed rates typically stay above 6 per cent for a few months – but as it isn’t easy to predict how the money market rates will move in the second half of this year, this may not turn out to be the case.

Overall, the equity release market in 2006 appears to be in good shape to meet the challenges it will undoubtedly face – and there’s a lot of opportunity for properly qualified advisers to take advantage of this.

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