If you go back just 10 years, the sector struggled to conjure up even £1bn of new lending a year, according to Key’s Market Monitor.
Since then, though, the sector has grown by 357 per cent to around £4.4bn of lending last year. No matter which way you cut it, that is pretty spectacular growth, whatever the industry.
Part of the reason why the sector has flourished is down to the fantastic job financial advisers have done in changing people’s perception of equity release.
In the 1990s, the sector had a less-than-savoury reputation and equity release loans were often seen as a last resort.
However, it is obvious this has now changed, as the new lifetime mortgage products – now called later life lending – are so far removed from the old-style equity release plans. Consequently, older borrowers now view later life lending as a reputable and sensible route to accessing their equity to improve their retirement or to assist loved ones.
While this is true, it feels as though the sector is missing out on a huge opportunity to help tens of thousands of would-be borrowers.
Over several years, our firm LMG Logistics has compiled unparalleled data of leasehold properties in England and Wales, and we calculate there are around 480,000 leaseholders who are unable to borrow money in later life simply because they are trapped with a lease which is deemed too short to lend against.
They have what is known in the property sector as a mid-term lease, which is a lease that has 75 years or less to run. These are problematic for two key reasons.
Firstly, once a lease passes the 80-year threshold it begins to depreciate in value. Once it reaches 75 years the deprecation really begins to accelerate, unless the lease is extended, which most leaseholders in the country have a statutory right to do.
However – and here is the second problem – extending a lease, a process known as enfranchisement, can cost tens – or even hundreds – of thousands of pounds.
Most people, particularly those in retirement or who are on fixed incomes, simply don’t have that sort of money lying around. So, unfortunately, they are essentially trapped with a depreciating asset.
As if that wasn’t bad enough, they also find it impossible to secure a loan and no lifetime mortgage provider will lend to them – and understandably so. After all, how can you secure a debt against something which is continually shedding value?
Funding the solution
Leaders in the later life lending industry have been trying to crack this nut of how to lend to mid-term leases. The short answer is you need to support and fund the leaseholder through enfranchisement, then they can borrow.
Our number-crunching shows that even helping one per cent of this trapped cohort of society to access later life lending would grow the market by some £500m per annum – or more than 11 per cent.
It doesn’t take a mathematician to imagine how big the industry could become if five per cent or even 10 per cent of those trapped with mid-term leases could access later life lending.
But more importantly, it would provide a lifeline to tens of thousands of borrowers with nowhere else to turn.
LMG Logistics has partnered with market leaders Key Retirement and Vantage Finance and have devised a process which supports and funds mid-term leaseholders to extend their leases, through to the point where they are able to access lifetime mortgages in the usual way.
The leaseholder will benefit from extending their lease, as their home goes up in value, in most cases, by the same amount as they pay for the 90-year extension, and the new long lease performs much better as an asset. The numbers work in favour of the leaseholder.
However, it will take the collective skills, determination and brain power of the entire mortgage advice industry to reach all of the mid-term leaseholders who need to borrow in later life.
The potential for change is huge – but we first, as an industry, need to recognise that there is a problem here which can be resolved; we just need to reach out and inform this latent, unserved mid-term lease sector.