A case could be made out for Defined Benefit Pension transfers or perhaps missold investments, but as I stated in a recent roundtable hosted by consultancy MRM, in my view, we should be worrying about equity release.
Before I go on, I want to make it clear that I am not completely against the idea of equity release. In fact, I believe it has an important place in the market. For the right person, an equity release plan could help make a huge difference to their quality of life. But I really worry these plans are being oversold.
I’ve said before that an ageing population, a lack of sufficient income in retirement, a lack of any real choice in later life borrowing options and a lack of customer understanding compounded by a disjointed regulatory framework is creating a perfect storm in the later life lending market.
Younger older borrowers
Throw into the melting point the fact that brokers are increasingly punting equity release as an option to younger age groups, and we are building potentially a very significant problem for the future.
At the MRM roundtable, my concern related to the recent uptick in lending to the under 65s and, in particular, the rise in sales to those as young as 55.
A look at the available market data, however, shows that younger borrowers’ share today is actually below where it was pre-crisis. In 2008, the under 65s had a 26 per cent share of equity release sales.
Post crisis that fell to 12 per cent but since 2015 has been increasing again to today’s 20 per cent.
The real cost of home improvements
Given everything we know about the cost and type of products being sold back in 2008, the regulator no doubt has on its radar what might be lurking in lenders’ back books and a concern about the overall outcome for the under 65s sold a lifetime mortgage back then.
But even looking at today’s sales, who is factoring in the increasing costs of old age and the decline in state provision? Who is considering what asset is going to be left for someone under 65, taking out a lifetime product today to fund going on holiday or making home or garden improvements, its most popular uses?
Who is considering what is likely to happen when ill health strikes and there is a real risk that state care will be refused or prove woefully inadequate? Can anyone honestly say that it is ever going to be good advice to tie someone to an expensive lifetime mortgage and forego the ability for them to look after themselves in old age for the sake of a holiday or a new extension today?
How many of us, if we are honest with ourselves, truly believe that we will one day get old and frail, and will eventually need care? Very few, I would imagine.
However, the reality is that living into your 80s is now the norm and therefore it is very likely that more of us will need care in old age. A 2018 study published in the Lancet Public Health journal estimated that the number of over-65s requiring round-the-clock care will rise by a third by 2035.
For most people, the only way to pay for this care is their home. But that’s not going to be an option for those giving up the equity in their home in their 50s. And, worryingly, those numbers look set to increase.
UK Finance’s latest figures on the interest-only maturities issue confirms the market view that future lifetime borrowers are going to be in younger age groups because of the need for many interest-only borrowers to refinance using equity release.
UK Finance estimates that there are around 1.5million interest-only loans still outstanding. Some 60,000 will mature this year, owing on average £104k, and they estimate that half of those borrowers will be under 65, with an equity profile that makes them suitable for equity release.
So the problem looks set to grow. I don’t want to tar everyone with the same brush – I know there are good advisers out there doing right by their clients and thinking carefully about what’s in their best interests. But at the same time, there are others who are not. The FCA needs to step in urgently and look at this. If it doesn’t, then I worry we are sleepwalking into our next big problem.