Medical underwriting of equity release is a relatively new concept – certainly in comparison to the enhanced annuity market, which has existed in the UK since the mid-1990s.
Stuart Wilson is technical director at more 2 life
Medical underwriting of equity release is a relatively new concept – certainly in comparison to the enhanced annuity market, which has existed in the UK since the mid-1990s.
Just like an enhanced annuity, those with medical or lifestyle issues likely to affect their life expectancy can get an uplift on their plan. With a lifetime mortgage this means a bigger loan – or, more accurately, a bigger loan-to-value.
The sort of things that could qualify someone for an enhancement include being overweight, a smoker or someone with high blood pressure through to someone who has had a heart attack or diagnosed with cancer: the more serious the condition(s), the higher the potential LTV.
Enhanced annuity providers like Just Retirement and Partnership Assurance have reported from their own research that as many as 60-70% of people reaching retirement age have a medical condition that could qualify them for an enhancement. And research carried our recently by Age UK showed that 40% of those aged 65 and above have a limiting, longstanding illness.
Given that perhaps almost two thirds of people applying for a lifetime mortgage could qualify for an enhancement, it is disappointing – and potentially even a TCF issue – that enhanced sales account for only 5-15% of the total market.
One reason for this could be that not every client is looking for a ‘maximum cash’ solution, and certainly those who want a specific rather than maximum lump sum can end up being charged a lower rate of interest. But more 2 life believes that all clients should be made aware of the opportunity to access a larger LTV through medical underwriting and more advisers should be asking their clients questions about their health.
So, what are the potential advantages of medical underwriting?
Debt consolidation
The equity release (ER) market has grown predominantly as a result of its use as a debt consolidation tool. Historically, ER products have been a ‘distress purchase’, usually made be older clients (70+) who need access to meet living expenses and/or repay existing debt such as personal loans and mortgages.
While we believe the ‘DNA’ of the ER market is evolving (that is, the type of customer who buys ER and what they use it for) – and this will continue to evolve as a result of the recent pension reforms – debt consolidation will remain as one of the primary drivers of organic growth in this market.
Today’s retirees are more likely to enter retirement with pre-existing debt. This could include credit cards, overdrafts and personal loans – in some extreme cases even payday loans. We also have the three ‘tsunami’ waves of interest-only mortgage maturities over the next 17 years that will see something in the region of 40,000 IOMs mature where the account holder is aged 65 or older. Many of these people will have no or insufficient personal savings to repay this debt.
Given that the Baby Boomer generation and certainly Generation X are more relaxed about securing and managing debt than their parents/grandparents, it is likely that we will continue to see rising levels of debt amongst those approaching, at and in retirement.
Arguably, therefore, securing the highest possible LTV becomes even more important for clients who are likely to have higher levels of debt – consolidating expensive short-term debt such as credit cards and loans, as well as repaying an existing mortgage, will be paramount but the financial needs of these clients are unlikely to end with this repayment. They will want to consider their longer-term financial needs in retirement. Unless they have planned exceptionally well for retirement through pension savings, there is likely to be a shortfall in the finances of many people entering retirement and a lifetime mortgage could help plug that gap.
A higher LTV, leading to a ‘max cash’ solution, could give clients more options in retirement, allowing them to consolidate debt AND plan for a better financial outcome in retirement.
Maximum facility – the drawdown option
The ER market is already changing and likely to continue to do so. Whereas once lump sum products dominated the market, today about 60% of all sales are for Drawdown plans – where the client takes a smaller lump sum up front and then comes back for further advances as and when they need more cash.
This approach can have a number of advantages and uses. The main advantage is that the client is not rolling up interest unnecessarily. If they do not need a larger lump sum, this drawdown approach can make more financial sense over the longer-term.
Although not ‘income’ in the true sense of the word, using drawdown on a regular basis could be used, for example, by clients looking to fund a particular ongoing financial expense, such as care home fees.
With the recent pension reforms, we predict a surge in interest in these types of plans as clients seek to use all of their investment assets in order to meet their retirement financial needs – that will increasingly include their property wealth as well as their pension savings, ISAs and so on.
Given that the average life expectancy in retirement for a 65 year old is now around 20 years, and more people are living longer than ever before, it makes sense to try and secure the highest possible drawdown facility in order to give yourself the maximum flexibility for an uncertain future. And clients looking for the most flexible drawdown solutions should be considering a plan that offers both the potential for an enhanced LTV and an uncapped facility that means they can drawdown cash up to their facility limit whenever they want to and as many times as they want.
