As strong house price growth continued in the first half of 2007, across the majority of the UK, the demand for equity release plans has also risen by a fifth (18 per cent).
The Market Monitor, which tracks activity in the UK equity release market, has found that retirees released more than £660 million from their homes between January and June 2007, compared to just under £500 million in the same period in 2006.
Below are some of the key trends identified in the Key Retirement Solutions UK Equity Release Market Monitor (January – June 2007):
Demand for drawdown soars, while reversion plans fall back as regulation is introduced
One of the key trends identified in the report is the change in how people access the equity locked in their home. The demand for a drawdown facility – whereby a consumer decides a maximum amount of equity to release and then ‘draws down’ the cash in stages - rather than the traditional lump-sum lifetime mortgage, has risen by 225 per cent in the last year alone, and three providers have entered the drawdown market which now accounts for nearly half (44 per cent) of all plans taken out.
Dean Mirfin, business development director at Key Retirement Solutions, said: “The rise in people taking out drawdown plans in the last year alone has been astonishing but at the same time anticipated. We attribute this to the greater number of lenders who now offer this facility, the increased awareness among advisers that more lenders are offering drawdown and increased consumer awareness. Drawdown allows clients to ease their way into releasing the money locked in their home, with the option to come back for more at a later date. The result can be considerable cost savings when compared to a traditional lifetime mortgage plan.
“Over the same period, home reversion plans have fallen to just 6 per cent of all plans taken out (8 per cent in previous year), reflecting the regulation of these plans by the FSA from April this year. However, this is not a trend we expect to continue to see, and believe reversion figures will recover slightly in the second half of this year.”
Falling age of the equity release consumer
In the nine years that Key Retirement Solutions has been monitoring the equity release market, now (January-June 2007) is the first time the average age of an equity release client has fallen – the fall being from 71 years to 70.
Mirfin commented: “While a one year fall in the average age of equity release consumers may seem a small change, we strongly believe that this is an indication of how the market will continue to change in the future. Whilst this trend reflects the greater availability of equity release plans from 55 years (previously the minimum was typically 60), it is also indicative of the fact that fewer people are retiring on good pensions and final salary benefits, and we predict more people will need to supplement their pensions at an earlier age, with many using the assets held in their home to do so.”
Regional trends – Scotland sees big growth, yet South East still leads the way
Scotland and Northern Ireland saw the biggest jump in retirees releasing equity from their homes in the first half of this year, up 233 per cent and 202 per cent respectively on the previous year. Unsurprisingly, both areas, alongside London, also saw the biggest increase in house prices in the last year.
Yet it was the South East of England that saw the largest number of equity release plans taken out overall – just over a thousand more than the next most popular area (North West), with average plans of just over £60,000 in the South East and nearly £80,000 in London. The popularity of these plans in the South East and London has been dominant and growing for several years and is reflective of exploding average house price growth in these regions, seeing rises of 10.7 per cent and 15.7 per cent respectively in the last year alone.
Mirfin commented: “As house prices in the UK, particularly in the South East and London, have soared in the last decade many people in, or nearing retirement, are clearly finding themselves living inside what may now be their biggest and most valuable asset. The more recent volatility within the housing market, fluctuations in the base rate and soaring costs associated with moving home, such as stamp duty, has also meant that a lot of people have stayed put in their homes for longer. As a result more people need cash to improve, change and modernise their existing homes.”
Lender activity – rates start to head upwards
Although no new lenders entered into the equity release market in the first half of 2007, the key players haven’t sat still. Rates increased across the board, reflecting swap rate increases for long-term borrowing, following years of significant rate decreases in the equity release market. Providers have also been developing their equity release offerings, entering into different areas such as drawdown.
Mirfin commented: "As in the mainstream mortgage market, equity release rates can go up and down. The base rate has increased along with swap rates, so we’ve also seen a rise in equity release rates. There is also greater competition between equity release lenders, seeing them expand and develop their product offerings, which makes it vital that people seek specialist independent equity release advice to help them navigate the market. Now is a good time for those considering equity release to take advantage of rates while they are low.”
Market Monitor report conclusions
Mirfin concluded: “The strong growth in demand for equity release plans highlights the greater awareness the industry has gained and how it continues to develop. Better flexibility and more transparent products have considerably shifted the normal equity release trends, and helped make equity release a suitable option of many more people to access the money locked in their homes.
“In the last decade, self-regulation of the industry via SHIP (Safe Home Income Plans) has meant that many measures are in place to protect the consumer. People can also remortgage to a better deal after an initial period if interest rates have changed, just like a standard mortgage, and we are pleased that the FSA now fully regulates the entire equity release market as this will only bring added confidence to what is a growing and vibrant market.
“We are also firm believers that non-one should commit to any form of equity release, without first seeking independent and specialist advice. This is why all our advisers are trained to the highest standard and why we now also offer the Lifetime Advisory Services, so that other advisers in the market can be suitably trained to advise on equity release.”
