Equity release has adapted to consumer needs

But the equity release market has come a long way in just a few years and has proved it can be a useful way for some clients to free up the equity in their property in order to pay for home improvements, or a holiday.

For some homeowners, a lifetime mortgage will be a suitable option for them and many of the products now available boast more competitive rates.

“With life expectancy increasing, there is a growing need for equity release solutions,” observes Jonathan Harris, managing director of mortgage broker Forensic Property Finance.

This is borne out in recent figures published by the Equity Release Council, revealing that homeowners accessed £1.06bn of property wealth via equity release in the first quarter of this year – a year-on-year increase of 14 per cent.

“These schemes have gone through a revolution in recent years, with more innovative products allied to near-‘normal' mortgage interest rates and the ability to service interest, thereby avoiding rolling up, if preferred,” he adds.

A broader, more flexible market

Alex Edmans, head of retirement at Saga Personal Finance, agrees that the market has changed.

“The big difference in the market now, versus a few years back, is the flexibility that’s been added to equity release products,” she explains.

“You see plenty of products now with the ability to repay up to 10 per cent of the capital borrowed without early repayment charges alongside the normal interest payments. Inheritance protections have been added to lots of plans as well, giving further certainty.”

Ms Edmans adds that these kinds of add-on enable clients to manage the equity release debt.

Another development has been the growing interest in drawdown facilities.

Figures from the Equity Release Council for the first quarter of 2020 showed that drawdown lifetime mortgages remained the most popular type of new plan agreed, with the number of new drawdown plans totalling 6,267.

The average size of the first instalment of new drawdown plans rose 2 per cent from the fourth quarter of 2019 to reach £68,492.

These more flexible options suit the needs of a variety of clients and demonstrate a broadening of the lifetime mortgage market, according to Simon Gray, managing director of HUB Financial Solutions.

“A drawdown loan, where cash is taken when needed rather than as an upfront lump sum, is one way to reduce the speed at which interest is added to the loan,” he explains.

“Modern plans have options that allow borrowers to make either full or partial interest payments, and in some cases the more interest they pay, the lower the interest rate. They can have a ‘payment holiday’ or stop paying interest when they want.”

He has seen increasing demand from people wanting to make regular interest payments.

Potential lifeline?

But with the Covid-19 pandemic having left many homeowners financially worse off, advisers may begin to field more questions from clients about the viability of equity release to release some much-needed funds.

“There is no doubt that equity release can offer a lifeline to people who are struggling to repay their mortgage, need help meeting day-to-day expenses, or who want to support their families,” Dave Harris, chief executive of more2life, suggests.

“That said, we are very aware that in the current environment clients may be more vulnerable and as a lender [we] have introduced additional checks and balances to ensure that clients are making smart sustainable choices that work for them both in the long and short term.”

The pandemic will have knocked many people’s financial plans, Mr Gray adds.

“Although pensioners receiving fixed incomes tend to be more resilient and may have ended up spending less,” he notes.

“It’s likely we will see lifetime mortgages continue helping a growing number of people meet a range of needs, from refinancing debts, to providing a retirement income boost, to paying for holidays and home improvements, and for tax-efficient gifting to family.”

At the same time, the lockdown has proved challenging for lenders, which have been forced to adapt their processes quickly in order to keep operating.

Regulatory developments

While there are more flexible repayment options for equity release customers now, advisers will still want to ensure the product is right for their client in the first instance and that all other avenues have been explored before going down this route.

On average, HUB Financial Solutions only recommends equity release to one out of two customers after initial meetings with them.

“As part of the initial fact-find, we complete a thorough review of the customer’s eligibility for state benefits and this often reveals people can claim hundreds, or even thousands, of pounds of extra cash without needing to release equity,” he explains.

Later life lending is a specialist area and some advisers will not be qualified to offer advice or guidance about equity release.

The financial watchdog is already on high alert when it comes to the quality of advice given about lifetime mortgages.

On June 17 this year, the Financial Conduct Authority published the results of a review into the equity release market which revealed mixed results, including instances where the personal circumstances of clients were not always taken into account by advisers.

It is set to conduct a more detailed, follow-up review of advice in the lifetime mortgage market.

More2life’s Mr Harris says: “In cases where advisers feel that equity release might be a viable financial solution for their clients but are not qualified in this area, they should refer cases to specialists.”