Are ‘last resort’ products set for mainstream breakthrough?

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Equity Release - June 2014

Equity release has struggled over the past few decades to shrug off its image as a ‘last resort’ product, dogged by a poor reputation and based on a principle of ceding ownership of one’s ‘castle’ that is inimical to the average retirement age Brit.

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.

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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.