Equity Release  

How has lending on equity release changed?

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How equity release has evolved

How has lending on equity release changed?

Mortgage rates have come down rather drastically, compared to the early days of equity release, where lenders are now offering long-term interest rates in the region of 2 per cent to 4 per cent. 

So, how much of this has been driven by the huge supply of funding from life offices, and what has driven this increase in funding? 

As yields on other potential assets have decreased, there has been demand from a range of different funding resources, predominantly from annuity providers.

Traditionally there were four asset classes where people could put their money: shares, property, cash and fixed interest securities, such as gilts and corporate bonds, but in recent years their performance has not been great.

So as an asset class, equity release has been seen as a good match for the risk-and-return requirements of pension funds and other investors with long-term liabilities.

Lenders like the equity release market. Commentators say reasons for this popularity is that the asset class is property backed, secured against property - residential property at that, which is quite difficult to get exposure to.  

Also, many equity release mortgages have greater longevity than standard residential mortgages, which provides some certainty of income over the long term.

How much of that income, however, is determined by the age of the customer, the value of the property and loan-to-value of the equity release loan, Paula Steele, director at John Lamb Hill Oldridge, says.

Other factors are the property itself, such as the location, or whether it is listed, thatched, single skin; whether it is subject to leaseholds, family dynamics, ownership and so on. These varying factors determine the attractiveness of equity release loans to investors.

Balancing liabilities 

The growth in the pension risk transfer sector has also driven up demand for equity release as an investable asset.

Steve Wilkie, chairman at Responsible Life, says major insurance companies are insuring the pension funds of blue chip companies, creating thousands of new customers and billions of pounds worth of pension liabilities, so equity release mortgages are a good asset to complement these liabilities. 

Mr Wilkie adds: “The customer is winning as a result, due to increased demand for their business, driving lower rates and more flexible features.”

Mark Gregory, chief executive of Equity Release Supermarket says: "Equity release lending is at the low end of the risk spectrum and so it is attractive for life offices and pension fund managers looking for safe returns on their portfolios – particularly given the continued stock-market volatility over recent years.

"The key determining factors for the interest rate offered are the same across all lifetime mortgages – namely the age of the youngest borrower and the amount they are looking to borrow relative to the value of the property."

But according to Will Hale, chief executive at Key, the increase in funding supply has not been matched by market growth which has led to fierce competition and therefore low interest rates.