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February 2020 | Equity Release

Claire Barker: Consumer debt and equity release

Claire Barker is managing director of Equilaw

Research published by the equity release lender, More2Life, has established that levels of unsecured borrowing are continuing to rise sharply amongst the over 55s, with the number of people who have been in debt over the past five years and have borrowed using credit cards found to have increased from 37% in 2018 to 54% in 2019.

In addition, the report has found that the number of over 55’s with unpaid bills has also risen dramatically over the past 12 months (climbing from 8% in 2018 to 16% in 2019), with almost a third using overdraft facilities or savings accounts to cover living costs and other day-to-day expenses- a shocking statistic. 

Yet, as stark as these figures are, they only tell half the story. Indeed, More2Life has reported that the total value of debt held by the over 55’s has risen by almost 50% in the past five years, with figures projected to grow by a further 35% over the next five to an overall value of £397bn, while the total value of debt owed by the over 65’s has also spiralled (from £86bn in 2018 to £91bn in 2019), with figures estimated to grow by a staggering 117% over the next decade- an incredible figure.

Experts have attributed this scenario to a combination of factors, with increases in house prices and the age of first-time buyers identified as leading to higher mortgage values and longer repayment periods. 

Moreover, the More2Life report has found that the number of over 55’s who are using credit cards to pay off mortgage debts has grown to almost one in five over the past year, while research by Canada Life has revealed that the number of equity release customers using loans to pay off mortgages has also risen, accounting for 49% of all transactions between July and September- a trend which they expect to continue in the coming years. But, that’s not all. 

Reductions in the value of pension pots have also played a significant role in driving up levels of debt or financial need amongst this age group, with the value of UK state pensions continuing to rank amongst the worst in the developed world (according to the financial services company UBS).

59% of retired women and 41% of men currently rely upon pensions, as well as other benefits, to cover half, or more, of their annual incomes (according to the recent English Longitudinal Study of Ageing), while longer life-expectancies and lengthier periods of retirement are already squeezing savings or incomes to their limits.

HOUSING WEALTH

Yet, as economic uncertainty continues to push living costs to new highs and the number of people servicing mortgage debts into retirement continues to grow, so too are more and more retirees becoming reliant on unsecured borrowing options. 

However, all is not lost. Research conducted by the property advisor, Savills, has discovered that property ownership amongst the over 50’s currently accounts for an enormous 75% of the UK’s total housing wealth, with years of strong price growth pushing equity values to a combined £2.8tn.

Moreover, figures published by the Office for National Statistics in 2018 have established that levels of ownership amongst retirees living on the lowest disposable incomes have also grown in the past four to five years (by over 15%), with around 660,000 homes falling under this category. 

So, the ability to translate this kind of wealth into a single capital payment or to drawdown equity payments to provide a regular and stable source of income is within the grasp of a significant number of pensioners in this country, offering a chance for those who are afflicted by mortgage commitments or decreasing pensions to service debts and boost existing income values accordingly- a fact that has not been lost on brokers. 

Indeed, Canada Life has discovered that over two-thirds (or 69%) of specialist advisers believe that consumer debt will become the number one driver of demand within the equity release sector over the next twelve months- more than double the recorded figure for last year. 

Nevertheless, in order to take advantage of this demand and to stimulate better awareness of equity release products amongst client-bases who are in debt or who are ignorant of the benefits that a lifetime mortgage or drawdown plan could have on their lives, the ER sector will need to ensure that it’s message is being heard and understood by much larger groups of people than at present.

Which, as we have mentioned before, places a considerable onus on lenders and brokers to provide the impetus for a new type of service model, embracing a role which encompasses both educational and advisory facets while emphasising the need to help people and change their lives for the better.

And while debt amongst retirees or those approaching retirement age isn’t likely to disappear overnight, there is every reason to believe that a better awareness and knowledge of equity release options could make a significant impact on their ability to lead more prosperous lives and to counter the need for unsecured lending in the
first place.

Because ultimately, equity release is more than just a commercial proposition.