Market growth has led to increased customer segmentation, as Steve Wilkie, chairman at Responsible Life, explains.
Equity release customers have a variety of needs that can be placed into three categories:
- Refinancing: either existing mortgages or unsecured debt.
- Future planning: advancing an inheritance early to family or planning their estate.
- Aspirational: looking to supplement their finances with their housing wealth to enjoy their life more.
Advisers also have products available which offer features such as inheritance protection.
Additionally, there are a variety of different redemption bases of calculating penalties; in many cases early repayment waivers on death and on going into care.
Most products will allow the customer to repay 10 per cent of the loan each year without penalty, with one lender allowing as much as 40 per cent of the loan to be repaid each year without any charges.
Mr Wilkie says: “Equity release products have responded to some of the past criticisms about inflexibility and now have a range of features that allow a customer to choose how they are used and how they will run throughout the term.”
According to Claire Singleton, chief executive of Legal and General Home Finance, these developments have been driven by the competitiveness of the market as well as its maturity.
Ms Singleton adds: “Good providers have listened to customers over the years and designed products to suit their needs.
“As awareness and demand for equity release has increased, the market has adapted, with greater flexibility and more choice allowing people to unlock the wealth tied up in their home.
“We think even product innovations around ‘green’ concerns could become more prevalent in the future.”
However, the increased popularity of the market has meant more complexity, particularly around advice, as evidenced in the recent FCA review into equity release and advice.
Although the regulator acknowledged the benefits of equity release products, it found examples of poor outcomes:
- Younger consumers not being told of their other borrowing options, such as traditional mortgages.
- Short-term benefits, such as consolidating debts and freeing up cash, being wiped out by the long-term cost of equity release, as the interest rolls-up (rather than being paid monthly) and compounds over many years.
- Customers paying substantial early repayment charges of tens of thousands of pounds only a few years after taking their loan, because their circumstances have changed.
- Consumers limiting their ability to release further cash or downsize in the future without repaying their equity release in full.
The FCA also found three significant areas of concern around the suitability of advice provided, which increases the risk of harm to consumers in this market:
- Insufficient personalisation of advice.
- Insufficient challenging of customer assumptions.
- Lack of evidence to support the suitability of advice.
Mr Hale says: “Advice meetings need to be highly personal, to explore in detail individual circumstances and be supported by documentation that works from a customer communication perspective – not as just a way of ticking the compliance box.
“That said, it is good that the FCA acknowledged that in their review they had seen some good outcomes where consumers ended up with an equity release product that met their long-term needs.
Ms Steele adds: “Advice is not personal enough and in many cases leaves a lot to be desired. I think this is slightly a function of the average release being less than £50,000 and it’s difficult to give personal advice at that level.