The equity release products that meet client demands

Property ownership is currently highest among people aged 55-64 at 81 per cent and, of these, most have net property wealth in excess of £125,000.

As house prices have recovered strongly in nearly all areas across the UK and while annuity and savings rates continue to languish, figures from the Equity Release Council for the first three months of 2014 revealed the largest first quarter lending total for equity release since records began in 2002.

Total lending through equity release in the first quarter of 2014 was £315.5m: an increase of 2 per cent from the final quarter of 2013 and 35 per cent year–on-year.

Nigel Waterson, chairman of the ERC, says: “For a generation who have huge amounts of wealth tied up in property but a shortage of savings to support their retirement, equity release is providing financial stability to a growing number of older homeowners.”

Lending constraints

The need to rely on equity release has been exacerbated over the past year as mainstream mortgage lenders pulled back from both interest-only mortgage lending and lending to people past retirement age, in the wake of ever more foreboding regulatory rhetoric and ahead of tough new lending rules under the Mortgage Market Review.

Traditionally equity release was associated with home improvement projects or the pursuance of new activities and interests in later life, says Mr Waterson.

But with the MMR rules requiring lenders to crack down dramatically on affordability and much more stringent criteria restricting sources of eligible income, increasingly equity release is being used simply to pay down mortgage debt.

“We are seeing customers typically withdrawing a quarter of the total value of their property through equity release, giving them a substantial sum to help boost their income and clear existing debts,” adds Mr Waterson.

Stuart Wilson, managing partner of Gloucester-based Equity Advice and the Later Life Academy, says while his firm is seeing high demand for drawdown products, there is a definite trend towards product features that cater for older customers with more traditional mortgage products.

“With the MMR coming into effect there is a big squeeze on lending to older clients to evidence repayment plans and affordability,” he says.

This is leading clients to favour products such as those from More 2 Life’s and Stonehaven’s, he adds, where interest can be repaid so the debt does not increase. See table below for details on the plans.

(Source: Key Retirement Solutions)

His firm also has access to products from Aviva and Hodge Lifetime where customers can repay capital and interest on random payments each year, up to 10 per cent of the amount borrowed.

“This fits in with a more traditional need from consumers to borrow secured monies in retirement providing them with more control,” explains Mr Wilson.

Product evolution

This shift in clients’ needs has encouraged an evolution in the type of equity release products favoured with rising pressure on lenders to develop more innovative products, says Dean Mirfin, group director of Preston-based Key Retirement Solutions.

“More flexible approaches to repaying some of the loan early are emerging and I would expect there to be more scope in this area, providing the pricing of such loans do not become prohibitively high,” he says. “I think that there is pent up demand for higher loan to value interest-serviceable products.”

He argues that as MMR beds in some equity release lenders are biding their time before testing these product waters.

But he adds: “While MMR affordability plays a part in the ability of lenders to offer this, we believe that with the right criteria lenders could offer higher LTVs where there is secure funding and capability to service repayments.

“This would not leave them exposed to house price deflation or slow inflation should a loan switch to roll-up as this would not need to be a criteria of the plan.”

Increasingly, borrowers are choosing more flexible product options, with ERC figures showing the total value of drawdown products up 25 per cent from £145.7m last year to £182.5m in Q1 2014.

While slightly less popular, the value of lump sum products sold also grew, by 50 per cent year-on-year from £87.8m in Q1 2013 to £131.8m in Q1 2014.

Within these broad product areas, some lenders also offer underwritten lifetime mortgages which evaluate borrowers’ health and lifestyle, potentially offering better rates. There are three providers of enhanced lifetime mortgages: Aviva, Partnership and More 2 Life.

“In terms of rate and LTVs each provider has its own underwriting methodology very much like enhanced annuities,” explains Mr Mirfin. “These options are proving beneficial for those wanting or needing the higher than normal. Clients can also have the added feature of drawdown as well.”

Wide-reaching reform to pensions announced in this year’s Budget will also have an effect on product provision, predicts Mr Wilson.

He adds: “I suspect we will see, and need to see, more focus on products that can fit the need for clients who wish to repay all or some of the interest and/or capital.

“We also need to see products where monies from pension pots from next year can be used to repay capital borrowing partially without penalty.”