Equity release is pushing at an open door

I have worked in financial services long enough to know that when you are asked about your career at a dinner party, you keep it short and sweet. We may well keep the economy going, finance people’s homes and ensure that people can pay for their shopping with a swipe but much of the industry is not glamorous.

That said, after decades of house price obsession, thanks to pundits such as Martin Lewis, people are starting to get more engaged with their own broader personal finances. It might be getting a great deal on their mortgage, actively considering their pension savings or finding a better gas supplier. But not only are people talking about money more frequently, they are doing it more openly.

This cultural shift represents a huge opportunity for the later life lending sector as we need people to take a more holistic view of their finances – especially when it comes to thinking about their largest asset which is typically their property – as they plan their retirement. They don’t necessarily have to make use of their housing equity but they do need to at least factor this into how they plan their later life finances and ultimately their estate. And that is where I believe we as an industry have a challenge we need to step up to and meet.

What do I mean? According to Key’s Q1 Market Monitor in the first three months of the year, £1.18 billion was released or reserved by 11,190 people who took out equity release. While this is a fantastic sum for an industry which recorded sales of £187 million just ten years ago (Q1 2009), it is somewhat less impressive if you consider that over-65s have £1.118 trillion in unmortgaged housing equity. So who are the customers driving this growth?

Need

Analysis of our database suggests that people who use equity release fall broadly into three categories – need, want and management.

People who take out equity release before the age of 65 years old typically need to use the product either to repay unsecured debt, pay off a mortgage or meet regular living expenses. They may have found that they were unable to keep working due to ill health or caring responsibilities or that the only thing stopping them retiring was paying off their interest-only mortgage. Equity release meets a pressing need and allows them to solve a problem that may have been giving them sleepless nights.

Want

Slightly older customers (aged 65 to 75) are more likely to take out equity release to fulfil an aspiration such as a holiday of a lifetime or to ‘age-proof’ their property. While downsizing is an option to release capital and avoid the need to renovate, this is not always practical and estate agents admit that one in three (32%) of downsizers have given up on selling in the past two years. There is also the simple fact that most people have some emotional attachment to their home and even the area they live in.

Financial management

The oldest cohort (aged over 75) are the cohort most likely to use equity release for financial management – either gifting, rebroking an existing equity release product or managing inheritance tax liabilities. We also see a certain amount of widows who find that their finances are not as healthy as hoped as some of their pension income may have ceased when their partner died or their finances were not quite as secure as they imagined. Over twice as many (27%) single women look into equity release vs single men (13%).

Approaching retirement

Now I am the first person to admit that borrowing in later life, whether that be through a retirement interest only (RIO) mortgage, equity release or another traditional mortgage product, is not right for everyone. However, if there are 12 million people aged over 65 as the Office of National Statistics suggests should we not see more than 11,190 equity release customers per quarter and more than 112 RIOs sold in 2018? And that is the challenge we need to step up to.

How do we get into a situation whereby everyone approaching retirement thinks in terms of their total asset pool – my house is worth £x, my state pension is worth £y and my work place pension and additional savings are worth £x and therefore how do I use all of this to best achieve my wants and needs in later life?

It’s a tough question especially given the fact that the reputation of equity release has been somewhat mixed in the past and while it is now arguably one of the most regulated parts of retail financial services, we haven’t completely shaken off the stigma.

We also face the challenge of how people perceive debt and borrowing in retirement. Most people – and I include myself in this – will celebrate when we pay off our mortgage. It will feel like an achievement. That said, with the knowledge I now have about the products available I would not hesitate to consider how I might access my housing wealth in later life to meet a need either for myself or my family.

As the CEO of an equity release advice firm, you may suggest that this is self-serving but if you speak to any equity release specialist, they will be able to tell you about customers who say that equity release means they can have the heating on, sleep at night without worrying about debts and enjoy active, engaged retirements achieving long-held hopes and aspirations.

The products make a positive difference to people’s lives and those of us working in the sector need to stop being apologists for the past and be confident about the strength of the proposition we offer. We need to work to highlight this to the average over-55 year old and ‘normalise’ equity release as a core part of sensible retirement planning for the masses.

Retirement finances

So not only do we need to encourage people to consider how their property wealth might play a role in their retirement finances, we need to highlight the different ways it can be used as the process starts with an unfulfilled need.

Very few if any people lie awake at night thinking about the financial products they could take out – rather they are thinking about the home they want to buy, the child they want to help or the debts they are struggling to service.

Holidays, home improvements and debt repayment is only the tip of the iceberg in my opinion and we need to get customers, advisers and companies thinking about the products’ wider uses.

Care costs

Looking to the future, I certainly think that using housing equity to pay for care will become more popular. Currently the annual cost for a stay in a care home is around £30,000 which is a significant sum for someone on a fixed income; and 77% of over-55s have expressed the view that they would prefer to stay in their own homes.

Care at home costs around £17 per hour and while someone who needs 24-hour care is likely to find it makes more financial sense to go into a residential home, for many a couple of hours a day is more than enough to help. Furthermore, with the pressures faced by the residential care sector and stretched public finances the broader societal benefits of equity release in the care space are clear.

I am not alone in this view with Damian Green recently highlighting in his report for The Centre for Policy Studies the idea of annual care supplements which would be paid by downsizing or releasing equity. It remains to be seen whether this will capture the imagination of government and the general public but it is certainly worth debating.

Property purchase

Another area we are seeing people using equity release is property purchase. While a five-bed detached property in Bury might be gorgeous, it may have less appeal in later life if your family are all based in London and the money you raise from a sale would buy little more than a small flat in the south-east unless you are able to raise more finance. Some customers are therefore buying property using equity release to bridge the gap between the cost of the property and the deposit they are able to put down – so really just like a traditional mortgage.

Wider range of products

And not only are we seeing new uses for later life lending but more products with a wider range of features. In 2016, there were 73 different equity release products to choose from but this had risen to 221 by the end of Q1 2019 and these products have more flexibility than ever before.

One concern that people raise – even as they are gifting to their friends and family – is will I be able to leave an inheritance? Inheritance protection allows people to reserve a proportion of their property for inheritance purposes while using some of the remaining equity as they see fit.

Increasingly, we are also seeing plans which allow people to manage the impact of compound interest by making repayments – either on an ad hoc basis within agreed parameters or by repaying the interest on a monthly basis. At the end of Q1 2019, over half of products allowed one-off repayments while one in five allowed people to make monthly interest repayments. Again, this repayment flexibility brings equity release closer to the look and feel of a mainstream mortgage and potentially makes the products more attractive to a wider range of customers.

RIOs

For clients who are able and willing to make monthly interest payments, Key and other specialist advisers will look beyond equity release to a RIO or even a standard residential mortgage with a higher upper age limit.

While only 112 RIOs were sold in 2018, they are a great addition to the market. Not only have they encouraged people to think about their later life lending options but they can provide an ideal bridge between ordinary residential mortgages and equity release.

That said, the affordability rules around RIOs are challenging as the borrower(s) need to prove they can make the mortgage payments until they either sell the property, die or go into care – particularly difficult for many when considering the implications on death of the first life.

Also, it is vitally important that for those who qualify for both RIOs and equity release that both products are compared side by side. Whilst headline rates on some RIOs may be lower the protections offered through equity release such as guarantee of tenure, fixed interest rates for life and a no negative equity guarantee mean that these may provide a better option for many customers – especially when the aforementioned flexibilities around interest and capital repayment are considered.

Potential customers

So to return to my point – as a market, we have millions of potential customers, thousands of qualified specialist advisers and a wide range of products which have been developed to not only meet people’s needs but also avoid potential pitfalls.

We are pushing at an open door but if we aren’t more vocal in making a convincing case why housing equity can solve the numerous, very real problems that people face with their day-to-day later life finances, this potential will not be realised.

We need to embed the idea of your home not only as your castle but as a core part of the financial assets you have to draw upon in later life. An asset that needs to be considered and managed rather than ignored.

Only when we take that step will we see this market realise its potential and fewer, older people will suffer sleepless nights as they worry about how to pay for their utilities, help their families or get the care they need.