SPECIAL FEATURE: Equity release? Mind the gap

Sam Cordon

September 4, 2013

Great things have been predicted for the equity release market for many years, but the growth in the market has failed to materialise.

For the past few years, it has been easy to point towards the lingering effects of the financial crash as being the root cause, as providers exited the market and funding sources dried up. But is it the real answer?

If we cast our minds back further, the scandals of the 80s and 90’s do no favours for the reputation of the industry, and their legacy still mean that many people view equity release with caution. Are we getting close to the reason this market fails to take off?

In my view, not quite. As a founder member of Safe Home Income Plans (not the Equity Release Council), we played a key part in the introduction of the SHIP Standards in 1991.

They did a very good job of introducing a set of product and advice standards that were required at that time.

Today, they are still highly relevant and there are some excellent equity release products out there. But let’s not forget that the intention of the Standards was to protect a specific segment of the market – those who are asset rich, cash poor.

Which brings us to the real reason I think the market fails to live up to its potential – not everyone fits into that segment.

The average age of people considering equity release has fallen over the last 20 years, from about 80 in 1991, to under 70 today.

For younger borrowers, traditional equity release plans, in certain circumstances, can be too rigid.

For example, interest rates that are fixed for life provide certainty, but can be costly to break if borrower’s circumstances change. It can therefore be difficult to accommodate planned changes in later retirement, such as downsizing.

For those fortunate enough to benefit from a reasonable level of pension income, they may feel that traditional equity release is not for them. Younger retirees may not be ready to commit to a traditional lifetime mortgage.

This is the reason Hodge Lifetime designed the Retirement Mortgage. Provided that borrowers have a reasonable level of pension income, it puts them in control of their mortgage.

They pay the interest to keep the debt at a manageable level. They are able to make capital repayments (for example by using their tax free cash on retirement) and they are able to repay the loan without penalty at any time after five years. Over the longer term, there is also the safety net of an option to roll-up interest once the borrowers have turned 80, coupled with a no negative equity guarantee.

At a time when the size of the gap keeps growing, as more and more residential mortgages are taken out of the reach of those nearing retirement, the need to borrow in retirement keeps increasing. It’s potentially a big gap to fill!

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