Dan Jones  

Disappearing downsizers

Dan Jones

Dan Jones

Ask financial advisers to identify a business area that’s seen a surge in client interest and defined benefit (DB) transfers will doubtless spring to mind. 

All the noise around this subject means that the parallel boom in equity-release mortgages has fallen under the radar somewhat. As the DB din dies down, that may be about to change.

The return of equity release will ring alarm bells for some, given the scandals of the past, but some lessons have been learned. 

Equity Release Council (ERC) standards state that providers must accompany their lending with guarantees, which mean borrowers can never fall into negative equity or have their homes repossessed.

These rules will not eliminate concerns around the potential effect of compound interest on borrowers, but they represent a sensible step. The downside is that member firms are not obliged to follow these rules, though they must state in their literature which standards are not being met. The code also states that taking financial advice is mandatory before a lifetime mortgage, or similar, can be purchased. 

Either way, with business booming, lending standards have caught the eye of the Prudential Regulatory Authority (PRA). 

The Bank of England body warned in April that it had observed a loosening of borrowing terms. Now, with equity-release lending still growing by double digits every quarter, it has issued a consultation that providers say will oblige them to set aside more capital against their lending activity (see page 10).

The issue will be contested over the course of the consultation. At current rates of growth, another concern must be that the rise of equity release exacerbates the housing crisis by further stifling property market supply.

This may sound overly dramatic, but the social issue is worth considering. Many of those using equity release are doing so to pass money down to their children and grandchildren, instead of downsizing. So much so that lenders aimed at the downsizing market are struggling: shares in listed retirement property developer McCarthy and Stone, for example, are down 42 per cent over the past year.

The net effect of this trend is that fewer homes are coming on to the market – at a time when many believe a lack of supply is a principle cause of the house price inflation that has put property out of reach for younger generations.

The supply argument has its critics, but either way those releasing equity aren’t the bad guys in this situation. 

As the FT recently noted, giving up a family home can be an emotional wrench, as can making a property purchase at an advanced age. And the likes of McCarthy and Stone remain committed to leasehold properties, despite the public outcry on this topic. Not necessarily the most attractive prospect.

Downsizing should not be dismissed, however. Money passed on to descendants via equity release could well be used to get on to the housing ladder – but this would be the case if cash was freed up via a property sale, too. Choosing the latter option would also bring an extra property on to the market.