The equity release sector is the perennial bridesmaid of the lending market. There is a huge amount of potential in the sector but it is yet to take off and is consistently overshadowed by sales in the rest of the market.
Recent estimates from the Council of Mortgage Lenders (CML) indicate the market could potentially be worth £100bn in this country, but current sales are some way below this at 5% of total UK lending – a poor showing for a sector that has been in existence since the late 1960s.
Actual figures from the CML found that £1bn was lent as equity release last year, £852m of this was carried out by the members of the sector’s trading standards body Safe Home Income Plans (SHIP). The majority of equity release plans were sold in the form of roll-up mortgages, with reversion plans the next most popular at around 25% of sales. However, this year is predicted to be better, with predicted sales of around £1.5bn to £2bn.
A lot of the blame for the slow growth of this market has been attributed to past mistakes. David Connolly, product development manager at Mortgage Express, which is shortly to enter the market with its first equity release mortgage product, says: ‘There have been flawed product designs in the past, most recently in the late eighties. People who were out of pocket have, I believe, been compensated, but it has left a bad taste in many people’s mouths, although SHIP has gone a long way to improving matters and engendering confidence.’
However, he does not think the reason behind the slow development has been caused by an unwilling sales force. ‘I think lack of confidence comes from the customer side. Many intermediaries would not have been around when the problems occurred, but the customers would have been between 40 and 60. These people now have a need of these products and remember,’ says Connolly.
Simon McGuinness, equity release marketing manager at Norwich Union, agrees. He says: ‘Education is a factor and there is still a lot of wariness over these products. While awareness is growing, the understanding of how equity release actually works is low and we are spending quite a lot of money educating consumers. There are a lot of misconceptions out there.’
McGuinness notes that some lenders are already on record as saying they will enter the equity release, or lifetime mortgage market as it is soon to be known, once the Financial Services Authority’s (FSA) regulation begins. Apart from Mortgage Express, a non-exhaustive list would include both Nationwide and Standard Life, which have both announced plans, and Prudential, which has just entered the market, after teaming up with Northern Rock. Older persons’ group Saga has also entered the market this month in association with Scottish Widows Bank. Other entrants are inevitably out there, but are still sorting out launch issues.
‘Brand is phenomenally important, particularly given all the previous problems in the past. Intermediaries find it easier to recommend the known brands. Most intermediaries sell equity release to people coming through their door asking for it and these people are influenced by advertising activities by firms such as ours and already want that name, or one as well known,’ says McGuinness.
He adds: ‘We would really welcome more big name lenders in this market. Instead of the lion’s share of a small pool (currently 42%) we would prefer a smaller share of a much bigger pool.’
Mortgage Express has toyed with the idea of using its parent brand, Bradford & Bingley, for market recognition. However all its sales will be advised and, although the public may not know the Mortgage Express name, brokers do and the lender has said it will probably rely on their recommendations.
Equity release is a product that requires a large degree of consumer confidence and the more lenders that enter the market the more likely it is that take up of products will increase. While 60-year-olds are the fastest growing part of the population, research shows that children who, in the past, would have looked to inherit from parents are now more of the opinion that equity should be released and enjoyed by the parents while they are alive.
Steve Cook, product analyst at Northern Rock, says FSA regulation will be the making of the market, believing that as regulation comes in it will tend to put the seal of approval on equity release lifetime mortgages.
He says: ‘Nationwide has publicly been talking about entering the market, but it probably sees the sector as a minefield until regulation kicks in. We are sure to see a few of the bigger market players stepping in. Abbey National has products out on limited distribution, it is obviously dipping its toes in the water and will ramp it up after regulation.’
So it is fairly certain the market will have more players in the next year or so, but what of the products themselves? When the mortgage market becomes regulated next year then we may see more innovation. Cook says: ‘In the last 12 months rates have been forced down due to competition. When you think how there are not that many players in this market, and competition is not that hot, but nevertheless the rates are being forced down, it shows what could happen when the market really takes off. It is a natural progression that as competition increases then so innovation increases.’
Equity release is a fairly simple product to underwrite, as there is no need to assess the customers’ ability to pay for anything. A lender does have the duty to undertake a credit search but that is about all, apart from verifying the client’s age and value of the property. Equity release requires no health checks for those taking out a loan, yet it is a product frequently linked to annuities.
However, Connolly thinks this will shortly change. He says: ‘Health checks are yet to be a feature of lifetime mortgages, but it could be going forwards. We have looked at it as a natural progression. However it would require a medical underwriter.
‘Other variations could take into account that men die younger than women so they could have more cash, or even that life expectancy varies around the country. This sort of thing is after all a fundamental of how the lender gets repaid,’ says Connolly.
An odd facet of the Treasury’s decision that the FSA will not regulate reversion policies is that an intermediary selling lifetime mortgages will still have to assess the suitability of reversion plans, and may decide the need for one is greater than for a lifetime mortgage. The client would then need to be advised in that direction. The problem as seen by many in the industry is that the client may think that they still have some form of FSA protection as they would have had with a lifetime mortgage product.
McGuinness says that the failure to regulate reversions undermines the whole point of regulation in the first place. He says: ‘We are concerned and are working with the CML, SHIP and the FSA to look at various ways of bringing in some sort of voluntary code regulation for reversion policies to fill the gap until they become regulated. Which they are certain to be in the future.’
He points out that intermediaries would need a good reason to sell a reversion policy. ‘Intermediaries, according to our research, are already less favourable to reversion policies at the present moment. After regulation I think this will become even more of an issue. The lack of regulation will worry the markets, given the history of past scandals.’
One future issue facing intermediaries is the precise nature of the exams which the FSA has said it may require. The main aim of the FSA is to protect the consumer. It has focused on lifetime mortgages as a higher risk product because of the age of the group targeted by these products, plus the extra complexity compared to a standard mortgage.
Connolly says: ‘The FSA will be releasing another consultation paper on the examinations it deems necessary to sell equity release but I would imagine that it would be something along the lines of a bridging paper to CeMAP or MAQ, which is all it would need. Any requirement of the salesperson to have investment knowledge would knock the product out of the range of a mortgage broker and the FSA is keen to keep the amount of outlets for these products open.
‘In the run-up to regulation intermediaries are generally concentrating on the buy-to-let and sub-prime markets, and for equity release to take off it would require they take the time to look at the market, to decide how big it would be in their local area and whether it is worth while getting involved with it. Plus in terms of time and money, extra training must also be considered.’
As the inevitable slowdown happens on the property market then intermediaries will be looking to plug any gaps in their income and it is unlikely the sector will remain the bridesmaid of the lending market for long.