Although the equity release market in the UK is big and booming, it is dwarfed by its American cousin, the reverse mortgage market, which stands at about five times its size. Whereas the UK market is still relatively new (in terms of being a mainstream product), the US market is large and mature and has experienced increasing regulation.
In the US, the single biggest player is American Advisors Group with a 20 per cent market share, and the rest of the market is fairly fractured with hundreds of providers competing for customers. The number of new reverse mortgages granted in the US peaked at around 110,000 a year in 2008 and 2009.
Bank of America and Wells Fargo stopped offering the product in 2011, as did MetLife in 2012. Lenders’ standards started to become stricter as many borrowers were financially constrained and withdrew the maximum available equity they could, which, when taxes, insurance and home maintenance costs were combined, led to high numbers of foreclosures putting a financial and reputational strain on lenders.
By 2013, the US government sought to encourage the release of home equity when used deliberately and conservatively. Lenders started to charge higher upfront fees if borrowers spent a majority of the credit issued within the first year.
The government issued further consumer safeguards in 2015 including affording non-borrowing spouses the right to stay in the home should their partner die, and a requirement for more detailed financial projections for potential customers.
The latest set of reforms, by Trump’s administration in 2017, will reduce the size of loans and increase upfront costs for many people, according to Peter Bell, president and chief executive of the National Reverse Mortgage Lenders Association.
While the US market is mature and there is some doubt as to its growth potential, there is plenty of room for expansion in the UK in what is already a £3bn a year industry.
Increasing demand in the UK
On this side of the pond, the number of households retiring with debt is increasing. One in eight people planning to retire this year have no pension savings. There is also the ‘ticking time bomb’ of interest-only mortgages, which are forecast by the FCA to reach ‘peak maturity’ in 2018.
The UK equity release market is dwarfed by the market in the US
Providers are tapping into increased demand for income in retirement
Nationwide is the first major provider since 2008 to directly offer this to borrowers
As a result, there is likely to be an increasing demand for alternative sources of income, such as equity release. There is a significant prevalence of home ownership in retirement in the UK, and, according to recent research by Just Group, even those retirees on the lowest income (average of £7,619 a year) have home ownership levels of 89 per cent. Previous barriers to equity release products taking off, and helping these retirees tap into their assets as a source of retirement income, have been largely shattered.
In the past, some customers were held back by wanting to leave an inheritance to their family, but these attitudes are changing. Research carried out by Royal London has shown that younger generations are less focused on receiving an inheritance, and 89 per cent of 45 to 64 year olds want to see their parents spending freely in their retirement. Only 45 per cent of 65 to 85 year olds anticipate that they will pass on an inheritance.