Are ‘last resort’ products set for mainstream breakthrough?

Numerous surveys have shown that financial advisers rarely consider it and that consumers are unaware of its functions or unable to overlook its past scandal.

To many the mere mention of equity release evokes bitter memories of the home income plans that got a bad name in the 1980s. Back then many were convinced to take out these uncapped plans, only to then see interest rates rise, house prices fall and their homes repossessed as a consequence.

But the industry has arguably come a long way since those dark days. For starters, the no negative equity pledge was introduced to ensure that any debt could not outstrip the value of the property, products have become more flexible and more and more people are arriving in retirement less endowed with assets.

The evolution of equity release, together with an increasing shortfall in pension saving and the tumescent war chest of property wealth on which our older generation sits, theoretically puts these once-loathed products in a promising position, with recent data reinforcing that sentiment.

According to the Equity Release Council there was a 36 per cent rise in total equity release lending from 2011 to 2013, and in the first quarter of 2014 this trend of rapid growth appears to have continued.

Georgina Smith, managing director of Stonehaven, attributes this post-credit crunch hike to more product flexibility, better awareness and changing living trends. Equity release, she argues, now presents a solution for elderly couples to help their younger family members, with one in five, according to research by the provider, now using lifetime mortgages for gifting purposes.

Pensioners, she adds, are increasingly seeing their younger relatives struggling with hefty deposits and expensive education that they were not burdened with, and feel “compelled” to help by releasing equity in their home. Moreover, she claims that lifetime mortgages have an important role to play in helping those trapped with interest-only mortgages.

“The interest-only mortgage time-bomb is ticking loudly and a lifetime mortgage offers a sensible solution.

“There are now 2.6m interest-only mortgages due for repayment by 2041, and worryingly as many as 48 per cent of those face a shortfall at repayment day with an average figure of around £71,000. Even more worryingly, the FCA has reported that 260,000 borrowers have no repayment plan of any kind.”

Guidance revolution

Stephen Lowe, group external affairs and customer insight director at Just Retirement, is also encouraged by a recent rise in popularity that saw equity release reach “record levels” following a period of uncertainty caused by a lack of lending during the credit crunch.

He anticipates that this surge in growth will continue off the back of a lack of pension saving and the Budget’s guaranteed ‘guidance’ pledge, which he describes as a crucial measure to raise awareness.

“In the past many people prioritised buying a home and paying off a mortgage ahead of saving into a pension for old age.

“A large part of people’s overall wealth is now tied up in their homes, in many cases well in excess of their pension wealth. Not everybody can or wants to downsize, so equity release provides an effective way to access some of that wealth, either for current spending, to give away, or to have as a financial cushion for the future.

“Professional intermediaries have an important role to play in helping clients at retirement see how best to deploy all their financial assets, not just pensions and savings but also the wealth tied up in their property.

“The biggest problem is that too many people are not seeking professional help, so they never hear about the options and fail to make a plan. We hope the new [Budget] rules will encourage many more to seek professional help.”

Not all advisers, however, are as upbeat about the future popularity of equity release. Stephen Jones, chartered financial planner at advice firm 75point3, thinks because people have worked all their life to clear their mortgage most will therefore not be keen to immediately remortgage once the debt is paid.

According to Mr Jones, there is something in the “psyche” about not having debt attached to the main residence that has put many off equity release and, on top of this, there is a massive advice gap in the sector. Although his firm does occasionally deal with equity release queries, he explains that most of his peers prefer to completely avoid the sector.

“There are not that many avenues to obtain advice. Banks do not do it and most IFAs do not do it as they shy away from mortgages.

“Many mortgage brokers do not do it as they are not qualified or see it as too high a risk, so you are left with specialist later life advisers, who are not always the most approachable of individuals, and maybe the more multi-skilled IFA practices.”

Makeover required

In spite of his faith in equity release, Stuart Wilson, head of Equity Advice and the Later Life Academy, is similarly sceptical that the sector would become ‘mainstream’.

For this to happen he says jargon must be toned down and adviser interest and general awareness raised, which will require a drastic change in how the product is sold.

He says the “majority” of over-55s do not know anything about equity release, and that those who do tended to judge it on its scandal-ridden past. In addition, he claims that the status quo is unlikely to change while advisers continued to shun the products, which meant a massive overhaul is required to salvage its image before the government’s guidance regime began.

“We as an industry badly present the product. We ‘sell’ equity release when what we need to do is provide ‘round the world holiday’ plans, home improvement plans and ‘help the family out’ plans, thereby presenting the scheme as a solution and not a product.”

“Consumers have disengaged with advisers, and at retirement often do not see the need, or want to pay for advice. So if the consumer engages with the new ‘guidance’ regime and we as an industry can begin to talk English again and meet consumer needs, then the product really can come into a broader market.

“If we continue to sprout jargon at consumers they will continue to disengage.”