Equity ReleaseMay 23 2018

The rise and rise of the equity release market across the UK

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The rise and rise of the equity release market across the UK

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.

Key Points

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.  

Some product providers offer inheritance guarantees, which means an inheritance can be left to loved ones within the product terms. This continuing evolution of equity release product design to meet customers’ needs is one of the factors underpinning its sales success.

The Equity Release Council’s Spring 2018 report indicates that the range of equity release products in the UK is growing by a quarter each year. Other new product features that meet customers’ diverse needs include permitting higher loan to value ratios, downsizing protection, the option to move home and cashback or cash reserve facilities. 

Customers are taking advantage of the flexibility the current breed of products offer and there is a trend of customers increasingly taking a ‘drawdown’ approach to accessing housing wealth. This has meant the formerly niche products are appealing to a wider potential audience by offering many flavours of product to suit different customers’ tastes.

Providers in the UK are increasingly tapping into the increased demand for new sources of income in retirement, with older homeowners releasing almost three times as much equity from their homes than they did two years ago. The UK industry seems to be facing fewer issues than those experienced in the US a decade ago due to a number of factors: in the UK product sales are overwhelmingly through financial advisers; lenders are careful about the amount they let customers withdraw; and the industry is well regulated.

New entrants to the market

In the UK, the equity release market has historically been highly concentrated, with Aviva and Just jointly making up more than 75 per cent of annual sales. However, the entry of Legal & General into the market in 2015 has shown how there is room for new players with a differentiated offering, particularly around distribution.  

L&G partnered with mortgage provider Santander for its market entry and by the following year, 2016, it had secured almost a third of the total market share of equity release sales. This marked the first partnership between an equity release provider and a mortgage provider.

Building society and mortgage provider Nationwide entered the market in November 2017 – offering the product itself rather than partnering with an insurer. Nationwide is the first major mortgage lender to directly offer this product to customers since the financial crisis. 

It is this increased competition among providers, combined with a growth in demand from customers, which has prompted product innovation and record price competition: the average interest rate for equity release products as of January 2018 was 5.14 per cent.

These market entries have served to cement equity release products as a mainstream choice for UK retirees. It would not be surprising if more providers continued to enter the equity release market, given there is genuine unmet customer need, the market is large and growing at a staggering rate and providers are able to make a good return on the products they sell. 

With Trump’s reforms, and some media commentary that the high costs associated with reverse mortgages in the US are ‘not worth it for most people’, it is not surprising that the reverse mortgage market in the US is falling at an annual rate of around 12 per cent. The UK market is a different story and is going from strength to strength.

Colette Dunn is head of strategy and Beatrice Male is a consulting actuary at Milliman