In an industry as changeable as ours it may not be advisable to make bold predictions. But with the consistent rise in popularity of equity release products, perhaps we can now be a bit more confident about the future. Some 25 years down the line, what will the equity release industry look like? I’m no Nostradamus, but I’ll give it a go.
In typical psychic style let’s start with one that is a near-certainty: equity release will become more well-known. Now some may implore me to couch my confidence somewhat, but this one I’m as near as positive about. With our population greying as it is and the vast majority of people not saving enough for a retirement that will be far lengthier than ever before, the use of housing wealth to help fund retirement will surely become more alluring.
For retirees owning a property worth much more than they originally paid, converting these gains into tangible tax-free cash will become very appealing.
The over-65s control the largest share of housing wealth in comparison to their younger counterparts. With little being done to support this generation onto the housing ladder, and house prices continuing their surge upwards, the elderly will continue to control huge amounts of housing wealth. Older borrowers are likely to use this wealth as a lifeline in retirement; a lifeline delivered by the lifetime mortgage.
A thriving market
My second prediction will, I believe, run parallel to the success of my first. As equity release grows in popularity, more providers and advisers will begin to see the benefits of joining a market that is thriving. Legal & General and others have either already joined the market in the past 12 months or made clear their intentions to do so, and I can only foresee more big names joining the party over the coming years.
I don’t need my crystal ball to tell you that with more providers comes more choice, more variety, more competition and a better deal and service for our clients. Moreover, new and talented advisers will also begin to see equity release as a serious option and a market that they could specialise in as the market continues to grow. As they say, build it and they will come.
But what about the cost? The detractors will continue to protest. It is true that compound interest can have a major impact on the remaining equity a client retains, and, based on current interest rates, the approximate amount owed will generally double after around 12 years. However, interest rates have been falling with equity release products and I believe that a future market in which there are more providers offering a much wider suite of products, the cost of a lifetime mortgage will continue to be driven down. What’s more, with added innovation and competition in the marketplace, the calculation of ERCs – at present somewhat complicated – will be simplified and the charges reduced as providers battle it out for new customers.
Hybrid mortgages
Although already available with some providers, I believe that the future of equity release lies with what has become known as the hybrid lifetime mortgage. For those clients who can, the ability to service a loan over a number of years can save thousands in compound interest. The summer Equity Release Council Market Report successfully highlights: “the annual ‘simple’ interest payment on a £77,494 lump sum lifetime mortgage at 5.97% would be £4,626. Over 10 years, this amounts to £46,264 compared to £60,894, where interest is compounded or rolled up.”
In other words, the ability to make payments could save you around £15,000 over 10 years. However, the security of tenure with a serviced loan is not the same as a rolled-up loan, unless it has the feature which enables roll-up if payments are no longer affordable.
The future of equity release lies with products that are flexible, forward-thinking and fit into the future landscape of retirement finance. The next generation of retirees will enter a period of retirement that will last much longer than their parents and grandparents, and there will therefore have to be a sea-change in the way retirees finance their post-work life. Just as the drawdown lifetime mortgage rose in popularity and overtook its lump sum cousin, as will the hybrid option soon become the third member of the growing equity release family.
