The potential for property to be used to help older consumers is undeniable but with the majority unaware of the range of options available, are we giving them the support they need?
While I am pleased to say that I believe we are doing a decent job, I think we could be doing more to ensure a greater number of customers make the right decisions.
This is a point that pundits are keen to point out – commenting specifically on the market’s siloed approach and the issues around affordability.
Both of these will need to be addressed as the overall later life lending market matures, but given its current immaturity should we be surprised by the relative dominance of equity release or concerned with the customer outcomes? Critics would argue yes.
In their view rates are high, compound interest can double the loan and advice fees are excessive.
This may have been accurate ten years ago, but it is not typically true of the market today.
Firstly, the lowest equity release rate on the market at the moment is 2.59 per cent and the average rate is 4.90 per cent. This is might be higher than retirement interest-only (RIO) mortgages or traditional mortgages but they also provide the security of a fixed rate for the life of the loan and a lifetime security of tenure. Neither of which are provided by a RIO.
The compounding of interest is undoubtedly a factor and those who choose not to make any payments will find that a 4.90 per cent loan will double over around 15 years.
However, the longer-term impact can be managed by using the flexibility of the new breed of equity release products by making both capital and/or regular interest repayments. Additionally inheritance protection and no-negative equity guarantees provide further equity protections.
While affordability assessments are not required on equity release products, they do prove a challenge for those considering a RIO.
There is also a fear that those taking RIOs could struggle with interest repayments during the term and either end-up losing their home or being unable to remortgage and stuck on high standard variable rates.
To my mind, modern equity release products which combine the traditional early repayment charge safeguards with new flexible interest and capital repayment features stack up favourably and in my view arguably surpass today’s RIOs.
So rather than focusing on why RIOs are not being sold, should we not be comforted that so many people are choosing additional protections and flexibilities over simply a lower rate?
Taking a step back, I would argue that now is the time for us to be truly product agnostic and focus on finding the right holistic solution for each customer. All advisers should be considering all potential solutions when advising a customer in this market irrespective of which market they advise in. This includes downsizing and other lending options such as RIO and/or equity release.
And finally, the issue around broker remuneration. Later life borrowing is a long-term decision potentially impacting on a range of areas in a borrower’s life. Face-to-face advice, benefit checks and allowing for family involvement, is often the most appropriate way to serve older customers but it is costly to provide.
If we want customers to consider carrying RIO mortgages through retirement, shouldn’t they be getting the same level of holistic support and shouldn’t broker remuneration simply reflect this?
Indeed, to my mind, the greater risk to the evolution of the later life market is the lack of appropriate consideration of all borrowing options.
Few mortgage brokers or lenders have the permissions or expertise required to advise on equity release and not enough have referral arrangements in place with trusted specialist partners.
This situation runs the risk of the customer picking the wrong generalist and ending-up with the wrong solution or, given the affordability challenges, no solution at all.
RIOs are a positive innovation for the later life lending market and I am certain that we will see these products evolve.
However, modern equity release products are too and over the next few years, I expect them to get even further away from the ‘inflexible, high interest rate, gilt-linked early repayment charge’ offerings of the past.
To build on this potential and service this demographic that is crying out for support, I believe we need to ensure customers get access to unbiased holistic advice across all options. That remains the fundamental challenge and we still have a way to go.