Speaking at the UK Finance Annual Mortgage Conference, the Financial Conduct Authority’s Christopher Woolard, executive director of strategy and competition, put the figurative cat among the equity release pigeons.
While his comments covered a wide range of topics, he raised concerns around the use of lifetime mortgages by younger borrowers – those aged 55 to 60 – and the impact of compound interest over long periods.
And – even as an advocate of equity release – it is hard to disagree with him that if a healthy 55-year-old takes out a lump sum mortgage, retains the product and lives until age 90, they will pay a significant sum at the end.
However, it is worth taking a closer look at this issue and putting it into context; like so much of the world today, itis not black and white, but rather a spectrum of shadesof grey.
Stats monitor
Key has been producing its market monitor since the early 2000s and as part of this, the proportion of customers that fit into each age group is tracked. In 2008, 27 per cent of customers were aged less than 65, and in 2018 20 per cent of customers were reported to be less than 65-years-old. For the younger cohort (aged 55 to 59), we have seen this remain the same at 5 per cent, and the slightly older cohort (aged 60 to 64) drop from 22 per cent to 15 per cent.
What do these figures actually mean? The overall percentage of younger borrowers has dropped – potentially due to a wide variety of factors, including the growth in later life lending options, increased ability to access pension savings and longer working lives. However, as the actual number of people taking out equity release has increased, we have seen an increase in the number of younger borrowers. But who are these younger borrowers?
| Key market monitor statistics | ||||||
| Age 55-59 | Age 60-64 | Age 65-69 | Age 70-74 | Age 75-79 | Age 80+ | |
| 2008 | 5% | 22% | 30% | 24% | 13% | 7% |
| 2009 | 5% | 23% | 29% | 23% | 13% | 7% |
| 2010 | 4% | 20% | 30% | 24% | 14% | 12% |
| 2011 | 3% | 12% | 29% | 27% | 18% | 12% |
| 2012 | 3% | 10% | 26% | 29% | 19% | 13% |
| 2013 | 4% | 14% | 29% | 26% | 16% | 9% |
| 2014 | 3% | 11% | 26% | 29% | 19% | 11% |
| 2015 | 2% | 10% | 24% | 32% | 19% | 13% |
| 2016 | 2% | 11% | 22% | 32% | 18% | 14% |
| 2017 | 3% | 12% | 21% | 32% | 19% | 14% |
| 2018 | 5% | 15% | 22% | 29% | 17% | 11% |
Reasons for release
Crudely, equity release customers fall into three categories with a certain amount of overlap: I need to access the wealth in my property (for example, debt repayment); I want to access the wealth in my property (for example, holidays); and accessing the wealth in my property will leave us better off financially (for example, inheritance tax planning).
From experience, younger borrowers tend to fall into the ‘need’ category – especially with the increasing number of interest-only mortgages that are due for repayment.
While equity release should certainly not be the default for those looking to manage their interest-only borrowing, it does help those who are not eligible for retirement interest-only mortgages due to the affordability rules – often the biggest hurdle facing a potential borrower.
So, the trickier question now is: should younger borrowers be using equity release?
Equity release is arguably one of the most regulated products an ordinary man on the street can take out, in that you not only need financial advice, but also independent legal advice to ensure you are making the right choice for your circumstances.
As part of this process, specialist intermediaries will thoroughly explore a client’s options. Have you considered downsizing? Are you getting the benefits you are due?
Would a later life mortgage be a better option? What about a Rio mortgage?
These are all questions and conversations that people have – at any age – before they take out an equity release mortgage, so younger borrowers are not only aware of their options but also the potential impact of things like compound interest.
Key Points
- The FCA has raised concerns about the use of lifetime mortgages by younger borrowers
- Equity release customers fall into three categories: need, want and to be financially better off
- Compound interest can be an issue for younger borrowers, but equity release does fulfil certain consumer needs
The right product
And sometimes, equity release is indeed the right product for their individual circumstances, especially with the innovation the market has seen over the past two years.
For example, early repayment charges are changing; you can now find products that no longer peg the ERCs to gilts, but are fixed for a decreasing term.
It is entirely possible that after 10 years, Bob, who took out an equity release mortgage at 56 as his wife was unable to work and he could not make the mortgage repayments, could use the tax-free lump sum he took from his company pension to repay his equity release borrowing without worrying about the ERCs.
If the client is worried about compound interest, some equity release products allow clients to repay interest on a monthly basis.
So Mike (aged 57) who discounted a Rio due to affordability issues and concerns around the risk of interest rate fluctuations, may well be more comfortable with a serviceable equity release plan.
Enhanced equity release products that take into account a person’s medical history may also be appropriate for those clients who have a shortened lifespan.
These are just some simple examples of when it might be appropriate for a younger borrower to take out equity release, and there are doubtless hundreds more.
So while the FCA is right that compound interest is an issue if someone takes out an equity release mortgage at a younger age, we need to be careful about how we approach this.
Will Hale is chief executive of Key
