Innovation is driving the equity release market forward in the UK
The growth in equity release in the UK has been driven by innovation across the later life lending market, as the number of product options available has more than doubled in two years.
The latest market report from the Equity Release Council shows that as of August 2018, some 139 product options were available, more than double the 58 seen two years ago while in 2007 there were just 24.
It says that discussions about the potential for housing wealth to help meet diverse social needs from funding social care to providing intergenerational support, have brought opportunities for innovation across the later life lending market.
Also, the growing base of equity release customers in recent years, up by 81% from the first half of 2016 to the first half of 2018, has been met with an increase in product choices, helping to meet homeowners’ increasingly complex needs in later life.
In a sign that property wealth is emerging as a mainstream retirement funding choice, today’s equity release products also offer greater flexibilities to help customers manage their finances in later life and limit costs, the report points out.
Indeed, some 80% of product options offer consumers the choice to make ad-hoc, penalty free voluntary or partial repayments of their loan, up from 68% a year ago, while lifetime mortgages now include the option to ring fence equity. This means home owners can retain some of the value of their property as a guaranteed minimum inheritance.
Additionally, increased choice has come with lower pricing driven by greater competition in the sector. The average interest rate for equity release products was 5.22% as of July 2018, down from 5.27% in July 2017 and from 5.96% a year earlier. Comparing average rates by customer rather than by product shows that the typical new customer paid less than 5% across both drawdown and lump sum plans.
Overall, lending in the sector remains stable as customers typically draw on less than a third of their housing wealth. A total of 38,912 households aged 55 and over used equity release products from members of the council to unlock housing wealth in the first six months of 2018.
This included 21,490 new plans agreed, up by 28% from 16,805 a year earlier. A further 15,709 returning drawdown customers made withdrawals from their agreed reserve funds between January and June, up 25% year on year.
Throughout H1 2018, the average house price among both lump sum and drawdown customers were above the latest UK average house price of £228,384. Across both product types, the average customer continued to draw on proportionate amounts of housing wealth below the 50% plus maximum loan-to-values available on the market. The average size of a lump sum plan was smaller in the first half of 2018 than in the same period in 2017, bringing the average loan-to-value down to 30.8%.
In contrast, the average drawdown plan increased, but customers continued to take less than a fifth, some 18.2%, of their total housing wealth as an initial advance, keeping further funds in reserve, limiting the build-up of interest over the lifetime of their plan.
‘These figures highlight the rise in new products and increased product flexibility, which is helping older homeowners to fulfil a host of pressing personal, social and financial needs. This innovation has brought more competition to the later life lending arena, while maintaining the standards and protections which ensure equity release products are futureproofed to provide good outcomes for consumers,’ said David Burrowes, chairman of the Equity Release Council.
‘As customers navigate their way through a growing range of product choices, including retirement interest only mortgages, the appropriate advice, guidance and support is needed to weigh up the various benefits, costs, flexibilities and protections to ensure they are suitable to meet both current and future needs,’ he pointed out.
‘Industry and regulators must continue to work to ensure customers are aware of all the options available to them when deciding how best to support themselves and their families in later life, taking all their assets, including pensions, savings, investments and property, into consideration,’ he added.
According to Alice Watson, head of product and marketing at Advantage Equity Release, more and more, equity release is becoming a norm. ‘The product development which has come to market has helped to open equity release up to a wider pool of customers whose needs weren’t tailored to before,’ she said.
‘Home owners are becoming increasingly familiar and comfortable with equity release and the potential benefits it can bring. We’re seeing a marked shift towards a holistic approach to retirement planning, with property wealth being considered alongside pension pots, investments and other assets,’ she explained.
Will Hale, chief executive officer at Key, believes that customer demand is transforming the equity release market triggering a surge in new products and challenging lenders and advisers to respond with more flexible options to reflect customers’ needs.
‘Our own data suggests that around 28% of equity release customers are using their property wealth to help families as well as to boost their retirement finances with some looking to property before pension funds aided by the increased innovation and flexibility,’ he said.
‘Customers are using their property wealth to tackle a wider range of issues from helping families to clearing mortgages and general later life financial planning. Specialist financial advice is key to helping customers make smart decisions and provides an opportunity for advisers demonstrate their expertise and to help clients,’ he added.