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Later life lending: releasing the potential – analysis

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  • 19/10/2017
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Later life lending: releasing the potential – analysis
As baby boomers age and longevity increases, along with levels of debt in later life, the mortgage industry is working hard to help homeowners make creative use of their assets.

The equity release sector surpassed £2bn of annual lending in 2016.

“If 2017 continues along its current trajectory, then we could also see annual lending surpass £3bn this year for the first time,” says chairman of the Equity Release Council Nigel Waterson.

He says retirement income pressures facing many savers in the era of defined contribution pensions and low interest rates are encouraging homeowners to consider a wider range of financial options.

“Housing wealth – often people’s most valuable asset – is an important part of bridging the gap between the comfortable retirement people want and the retirement they can afford from their pension and other savings.”

The broker opportunity

There is clearly enormous potential for brokers in this market despite its currently small size.

“£3bn isn’t much of the market but it is growing rapidly and there are a limited number of brokers,” says John Charcol senior technical manager Ray Boulger. “It will be increasingly important for brokers to recognise where both mainstream and lifetime mortgages would be an option.”

He adds: “Even if they only offer one kind, brokers need to be able to explain what the broad pros and cons are as the client often won’t know about the detail of the different options.”

David Edwards commercial director of Personal Touch Financial Services, says the broker community should be well positioned as most, if not all, products will need a fully qualified equity release adviser as part of the advice process.

“The growth of the market also means an increased demand for this specialist expertise which can be used to drive value back into a broker’s business,” he says.

“The challenge for brokers will be to keep pace with this quick changing market and with the increased demand for specialist advice. More qualifications and evidence of competency across a broader range of products and advice areas will become a prerequisite. Equity release will form part of a holistic view of later life planning that goes across the scope of most advice areas in retirement.”

Edwards adds that providers and sector experts are getting better at explaining how equity release works and in some cases how it is the most viable solution.

“The fear of entering into a non-reversible product or arrangement is being addressed by product innovation.”

Dean Mirfin, chief product officer for Key Retirement Group, agrees, as the growth of the market has been accompanied by new entrants and new products. “It’s the most complex it has ever been, but in terms of customer outcome it’s the best it has ever been.”

He points to changes in the market such as allowing overpayments, and features such as downsizing protection. Such protection means customers who move to a non-mortgageable retirement property won’t be hit with early repayment charges if they can’t take their mortgage product with them.

There are also benefits for customers whose circumstances change, making it hard to meet payments.

“In the lifetime mortgage world you can stop paying and convert to a roll up. It’s a much safer, less risky environment. That’s attracting a lot of brokers into discussing it with their customers,” he says.

Product innovation

Alice Watson, head of marketing at Retirement Advantage Equity Release, also agrees that innovation and development is vital. The company recently released an equity release product for landlords, for example.

“Equity release is going from strength to strength; 2017 looks set to be another record breaking year in terms of growth. But we can’t afford to rest on our laurels,” she says.

“The danger would come if we stop innovating and evolving our products and services to meet the needs of customers and advisers. As the retirement landscape changes, customer need to change in tandem. As providers we must keep pace with those developments.”

Brokers also need to keep pace with change. Recent innovation and product development mean that there is now greater flexibility than ever before. Watson says overcoming misconceptions among customers about the products is key to the market developing, and ensuring advisers are better equipped to overcome these preconceptions is a huge part of that.

“More also needs to be done to address brokers who have an old world view of the market; for example, that interest roll-up products are the only option. Lenders must continue to educate brokers about interest paying options or flexible capital repayment products.”

Any broker misconceptions will feed into customer perceptions of the market. While Watson says there have been real improvements, there is still room for improvement as many customers mistakenly think they will lose control of their property.

“Our research has shown that starting conversations earlier can help customers be more aware of their options, and stop misconceptions from clouding thinking.”

The early nature of some of these conversations will prove tricky for some brokers. Mirfin says often enquiries may not come to fruition for a few years as customers arm themselves with the facts and then wait for the right time to use equity release.

“The conversation is a lot longer and you have to nurture people to come back to you when they are ready. Doing that on a small scale is tough.”

In general it may be hard for some brokers to justify skilling up for the sector if they don’t have sufficient volumes. He says some will choose to partner with an organisation that offers this skillset, or employ one specialist to deal with all the firm’s equity release and lifetime mortgage cases.

“A major limitation [for the sector] is in the area of dabblers – people doing the odd case here and there,” he says. “All brokers need to know enough to engage customers on the subject but they can then refer them to a specialist [externally or in-house].”

Broad knowledge is especially important as a mortgage will not be the right answer for everyone. “Pension freedoms mean customers have a wider range of choices,” says Waterson.

“Therefore, it is vital that advisers and brokers in this industry have a comprehensive and wide-ranging knowledge of a variety of solutions for retirees. A collaborative industry approach would mean that we can further join up the dots between equity release schemes, residential mortgages, and pensions.”

The industry will continue to innovate. “There’s one area that’s begging for innovation and that is more solutions for interest only maturing customers,” says Mirfin.

He says those with LTVs that are too high for lifetime mortgages should be able to benefit from future innovations in the sector which could make part of a loan permanently serviceable. “At the moment they are completely excluded.”

Masthaven mortgage MD Matt Andrews says his firm is planning to make announcements on later life lending early next year and that innovation needs to be about more than extending the age criteria.

“That’s not providing a robust solution for the customers whose income and needs are changing,” he says. “There is much more that can be done.”

He adds that brokers across the industry are looking at the sector and honing their skills and relationships to be able to offer these products.

“A lot of large brokers and networks are looking hard at this space because they see they may need to enhance the advice they can give.”

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