Reading January’s Which? magazine you’d be forgiven for thinking we’d leapt back 20 years to the 1980s, when equity release was synonymous with scandal. Armed only with this information, it’s understandable why some advisers have avoided the market. However, a closer look at the recent industry trends and levels of consumer demand reveals the picture is very different – equity release presents a fantastic opportunity for providers and advisers alike.
Far from being a last resort, equity release can be a valuable part of retirement planning. Let’s look at the facts: six million homeowners have not yet started saving for retirement and for those with retirement looming, releasing equity from their property may be a good way of supplementing their pension. In fact we know from our own research that 18 million homeowners plan to do this.
The question is: how? One suggestion is downsizing. This is an attractive option for some but unfortunately, given the dynamics of the housing market, it may not be viable for all. Downsizing involves moving to a smaller property or one in a less desirable location. This may not be attractive, nor even possible, for elderly people who live in a flat or a one-bedroom house, for example. And what would happen if the current crop of baby-boomers – who are the group most likely to have benefited most from rising house prices – all want to sell and move? Could the housing market cope or would the property ladder become property snakes and ladders?
For those who don’t consider downsizing an option, an equity release scheme may prove to be more suitable. In my opinion, it’s lifetime mortgages that are driving the market. For one thing, lifetime mortgages are regulated, which has helped to counter the concerns of many advisers and customers. More importantly is that the lifetime mortgage market has seen the greatest product innovation.
Steady growth
Let’s take a look at the stats. The equity release market is growing steadily. Since the turn of the decade the market has been booming, growing from around £100 million in 1999 to £1.1 billion in 2005. Datamonitor predicts that by 2009 the market could reach £3.6 billion.
This optimism is backed by consumers and advisers. Consumer confidence is strong. Pru’s latest research shows that 44 per cent of all over-55 year olds would consider using a lifetime mortgage to supplement retirement income. That’s jumped from just 18 per cent who said they’d consider an equity release product in 2004, and 9 per cent in 2003. The figure is even higher if you open the question to all age groups – 48 per cent of adults say they would consider a lifetime mortgage.
Regulation is a key factor. 31 per cent of people are more likely to consider a lifetime mortgage because of it. Also, it’s now more common for people to consider different sources of retirement income, rather than just relying on their pension. 47 per cent of the population plan to use the equity in their home to help fund their retirement and 16 per cent of people think it will be the biggest part of their pension provision.
Pru’s research among advisers shows they also share this optimism. A massive nine in 10 think people will need to release equity in their homes to help fund their retirement. And this appears to be driving advisers to capitalise on the opportunity. Many advisers who didn’t previously sell equity release are starting to – of the 57 per cent of advisers who don’t currently sell lifetime mortgages, a quarter tell us they are planning to within the year.
Finding the right product
But with more providers entering the market, how do you know which deals are best? Until 2005 lump-sum products dominated the market. These products have no automatic facility for customers to take additional drawdowns, so customers would often take the maximum LTV up-front – to cover the amount they wanted to spend right away, and to put some away for the uncertainties of the future.
This practice is not ideal, and indeed, the FSA picked up on it. Compound interest is charged on the full amount borrowed by the customer, even though they will probably only have spent a proportion of it up-front. And even if the customer re-invests the rest of the money, borrowing to invest exposes them to risk.
What’s more, if the customer wants more money in the future, with a single lump-sum product they will have to go through the whole application and conveyancing process again. This tends to mean they incur the administration and application costs again, and it’s not guaranteed they will be granted the additional loan.
The way forward
We think customers should be in control and product innovation over the last year has made that a reality. Flexible drawdown products allow customers to draw-down what they want, when they want it, subject to their maximum LTV. The customer is then only charged interest on what they have borrowed.
There’s huge demand from customers for this type of product. Since the Pru launched its Property Value Release Plan in the Autumn, there’s been massive interest. We’ve issued illustrations well in excess of £100 million, received thousands of calls from advisers and customers, and issued thousands of information packs.
What this demonstrates is people are excited by the idea of unprecedented flexibility. Advisers too are keen to find out more about how the flexible drawdown product can help counter concerns around using borrowed funds to invest for income and growth.
But what constitutes flexibility and what doesn’t? More products are being labelled as ‘flexible’ nowadays but in many cases they are not as flexible as they claim. Some impose time restrictions of five to 10 years from the outset of the loan for taking subsequent drawdowns and others include caveats in the small print capping the maximum LTV at double the initial loan agreed.
Brokers should look for a provider that offers a truly open-ended drawdown facility. Pru’s product means customers can:
Withdraw money at any time during their retirement. This is particularly important as needs change. For example, it may be in 20 years or so before further funds are needed to help with care costs. Here, it’s critical that the facility remains available and, even more importantly, the provider will still be around to provide the loan.
Borrow up to 35 per cent of the value of their property over the course of their lifetime – the amount available at outset depends on their age and it increases by 1 per cent per year (with the Flexible Plus option).
Continue to drawdown funds regardless of what happens to the property value – as the value of the property is fixed at outset.
The only circumstances where Pru would withdraw the drawdown facility are if the Bank of England Base Rate went above 10 per cent, if the borrower was declared bankrupt, or if the loan balance exceeded the property value.
Portability
As well as open-ended drawdown, it’s important to examine just how portable the loan is. As the name suggests, a lifetime mortgage is designed to provide access to wealth throughout retired life. It’s no good having a product that penalises people because their circumstances change. In retirement there’s a high probability that people will want to move house, or will go into long-term care, and so it’s important they choose a product that can accommodate these changes without an early redemption penalty.
The lifetime mortgage market presents huge opportunities for advisers and providers. Many people approaching retirement don’t have sufficient savings in place. More flexible deals only serve to expand the market as the product becomes a more efficient and cost-effective retirement planning tool, which advisers feel confident to recommend.
A lifetime mortgage is not a contract to be entered into lightly. It is not suitable for everyone, especially those who think they will want to repay it early. Customers should discuss it with their children and adviser before deciding if it is their best option. However, given the consideration they deserve, lifetime mortgages become a valuable part of an adviser’s retirement planning portfolio.
Jan Holt is UK head of sales, lifetime mortgages at Prudential UK
