SPECIAL FEATURE: Equity release’s unknown unknowns
Donald Rumsfeld received the rather dubious honour of the Plain English Campaign’s ‘Foot in Mouth award’ for his now infamous statement at a White House press briefing. But in essence what he said makes sense: sometimes you just don’t know what you don’t know.
And there are some worrying unknown unknowns in the equity release market too.
What we do know is that last year, the market grew to a record £1.4bn of sales. More than 21,000 plans were sold in what was, without question, a great year for the market.
What we also know, to a reasonable degree of certainty, is that the volume of enhanced equity release sales – namely, plans offered with a higher LTV due to the client’s medical history – equates to somewhere between five and 15% of that £1.4bn.
What is unknown is why it isn’t a much bigger percentage. After all, if we look across to the retirement income market, we know from research conducted by major enhanced annuity providers that as many as 60-70% of people reaching retirement have a medical condition that could qualify them for an enhanced annuity.
Given that fact, surely the average equity release customer (aged typically around 71 years of age) would also likely have a similar medical condition. And if they do, they could qualify for a much higher LTV – as much as 50% or higher in some cases.
In other words, the enhanced equity release market could in theory be as high as 60-70% of the total lifetime annuity market. So why is there such a gap between the theory and the reality?
More worrying perhaps is the other unknown. How many clients who could have qualified for a higher LTV have, instead, been offered a standard ‘healthy’ rate? How many millions more of lending might the market have achieved last year if those clients had been fully underwritten and offered enhanced terms?
It’s quite possible of course that some clients have simply not required a ‘max cash’ solution and have instead opted for a lower cost option, with a smaller lump sum at a lower rate of interest.
But it’s also possible that some clients have simply not been asked about their health, or they have not been asked the right questions. Medical underwriting of equity release applications can be as simple as answering a short series of Yes/No questions but can mean the difference between an LTV of 25% and as much as 55%.
Qualifying for a higher LTV gives a client more options. Even if the client isn’t looking for a max cash solution, having a higher reserve means they secure the flexibility to come back for more lending in the future should they need to.
Even relatively minor medical conditions such as high blood pressure and being overweight can make a difference to the size of loan the clients qualifies for. This is why it is so important to ask the right questions, because many clients may not feel they need to reveal key information about medication and medical diagnoses unless specifically prompted. For every adviser meeting a client for the first time, this is a classic unknown unknown that is just as important to uncover as, say, the client’s financial status and attitude to risk.
For every client looking for an equity release solution there is the potential for a better outcome through medical underwriting. More clients should be asked the medical questions that could make a huge difference to their personal financial outcome because that can only be a good thing for them and the market as a whole. That much IS known.