It is 25 years since the development of the standards that now govern equity release and business is booming. The Equity Release Council (ERC), guardian of standards and umbrella organisation for the sector, reports that lending was up 21 per cent in Q1 2016, compared with Q1 2015, to £393m – the highest Q1 lending level on record. The Graph shows the growth in the sector since 2003.
Simon Chalk, technical manager, equity release at Age Partnership, describes current rates as at record lows and highly competitive. Legal & General, for example, has just dropped its rates to below 5 per cent. And the reason for such low rates? Ample supply of funding with plenty of options, he says. So, two years after the sector was knocked by the new pensions freedoms it is awash with money.
Mr Chalk regularly meets with organisations interested in investing in the sector, who want an adviser’s perspective on the sorts of plans needed. “The biggest problem we have in the sector – and it’s a nice problem to have – is getting the money out into the market,” he says.
He believes that in the face of volatile markets, equity release offers a fixed return with reasonable certainty about when investors get their capital back. “It is linked to longevity and house prices and has very cautious lending limits. You can understand why they would want a piece of the action.” He says there is talk of several billion pounds potentially available for investment in the sector. Since the market is worth £1.6bn, there is clearly more funding than demand at the moment.
Different providers have different funding models. Bigger players, such as Aviva, L&G and JRP Group, have deep pockets and rich business sources because of their diversified business areas, such as annuities, and regular premium income on the general insurance side.
Packaged house providers, such as More2Life and Pure Retirement, mostly fund from external sources and have business-to-business arrangements. The money is sold on in products and they originate the loans.
Then there are mutuals, which he suggests may struggle with funding owing to some of the capital requirements, and the new emerging players, such as One Family, which promise to shake up the market.
He acknowledges that the funding and low rates will not remain forever. However, he says that with rates currently so low, an equity release loan no longer has to be something a customer takes to the grave; people can repay them in their lifetime. At least five providers offer the option to pay up to 10 per cent a year of the original loan.
Lacking innovation?
Recently, a prominent equity release advocate was quoted as saying that the sector lacks innovation, blaming the ERC’s strict standards. However, Mr Chalk disagrees, describing the Council as one of the most innovative trade bodies, especially for its relatively small size. He points to features such as protective equity and inheritance protection guarantees and medically underwritten plans as significant innovations in the sector in recent years.
He says that while there are many “me too” products, the market offers plenty of choice. He picks out More2Life’s product as “all singing, all dancing and me too plus” because of its flexibility. Customers are not restricted on when they make payments, or on how much they pay. Some products specify that repayments can be made only after a year, only four times a year and with a minimum of £500.
However, he would love to see a product that “annuitises the house value” and provides a regular drip feed income. He says that while drawdown plans allow a client to take an initial £10,000 or £15,000, many clients do not want or need that. They need perhaps £100 or £200 a month to top up their income. The problem is that a product like that would not appeal to investors. Capital would have to be ring-fenced and there would be administrative costs and banking charges, especially as people are likely to want to increase or decrease, start or stop payments. It would be difficult to make a profit on it.
Education
The real problem for the sector, he argues, is the lack of knowledge and understanding of the product among the public. Mr Chalk says the usual myths regularly come up in interviews. He remains committed to promoting education on equity release to dispel the ignorance.
As for the idea of doing away with the ERC standards, he is very clear on where he stands. “Twenty-five years ago we introduced standards and guidance for a very good reason. People are still remembering what happened but not understanding how it has changed since then. We don’t want to return to that. We don’t want those headlines again. It would kill equity release forever.”
Customers, he argues, derive comfort from the blanket of standards and guidance that the ERC has put in place. “Why diminish and dilute those standards?”
