The later life advice space is a little different to the mainstream, as customer fee-charging is much more prevalent, but it’s still the case that a noticeable drop in loan amounts is going to impact on income, especially if you have benefited from a previous period when loan sizes have been larger.
That’s essentially the situation we have at present within the later life market. There is some debate about whether we have a ‘new normal’ on loan sizes, and if so, how advisers factor that into their overall profitability and what they need to achieve in the future.
Planning ahead
You can’t business plan your future if the sands have shifted, and I suspect many later life advice firms are going to have come to terms with this and cut their cloth accordingly.
At a recent ‘Breakfast with Stuart’ meeting, I was asked about the noticeable drop in case sizes one adviser was seeing, and why this might be the case?
It’s certainly true, and we have the statistics to prove it, that average case sizes have fallen. Last year, Air’s average loan size was £120-£130,000, in January and February it was around the £100,000 mark, in March and April £70-75,000, and May was approximately £60k-£70,000.
For what it’s worth, I’m not expecting to see any further drops, but as an equity release sector we need to accept that loan sizes are likely to stay at this level for the foreseeable future.
Why it’s happening
There are a number of reasons behind this – lifetime mortgage lenders themselves have curtailed maximum loan to value (LTV) levels over the course of the last year, as rates have risen, and this obviously has an impact in terms of the loan levels clients can achieve.
Then there are the client’s needs themselves, and an inclination on their behalf to be more cautious in terms of the money they access. As we’ve said before, this is now more about need than aspiration. For example, the money is earmarked for essential uses – perhaps they need to pay the capital off at the end of an interest-only mortgage, or they have debt payments to clear at higher rates, or their children have had their mortgage declined and they need to support them.
It’s a real urgent need that is driving customer demand, rather than those willing to look at releasing equity in their home in order to fund a new car or holiday, which in the past did constitute a greater number of customers than now.
And, again, in my view, we won’t see the reasons behind equity release being taken as a product, changing anytime soon. Which leads us back to a future in which the smaller loan size is the more likely.
Larger loans will still have a place
Of course, that’s not to say we won’t see bigger ‘ticket’ loans being taken out, however – and I think this was something of a myth anyway – I’m not sure there was a huge number of loans being completed at the maximum LTV level anyway, certainly not during last year to 18 months.
In that sense, the direction of travel in equity release has been this way for some time, and advisers should have been able to track this.
What we are going to get – in my view – is increased demand from homeowners to access lower loan values in the months and years to come. We’ve already seen this growing in recent times, and while we have of course climbed over the potential obstacle of individuals not willing to utilise their house to access equity, they’re still more than likely to be cautious with the loan amounts, particularly if it is their first foray into this space.
One final point to mention – and a number of advisers have pointed this out to me – is that the bigger loan size cases are not necessarily lifetime mortgages cases, anyway. We, of course, have a later life lending market which is more than equity release, and it would seem the bigger cases are finding retirement interest-only (RIO) product solutions or hybrid products, or more mainstream mortgages with higher maximum ages.
As advisers it’s clearly important therefore to have access to all those available products, to be able to consider these for each client particularly if they don’t meet the brief when it comes to a lifetime mortgage.
