While the credit crunch is hovering like a threatening rain cloud over the mainstream mortgage market, a small glimmer of light is breaking through: equity release.
Such a thought would have been inconceivable 10 years ago, when equity release was fighting against a negative image and tarnish from the shared appreciation brush. Today, however, the market has taken many positive steps to raise its profile and industry trade body SHIP has led the way in campaigning for its regulation.
When home reversions were omitted from Mortgage Day regulation in October 2004, SHIP joined forces with other organisations to challenge the Government and create a level playing field across the equity release market. To bridge the gap ahead of formal regulation in April 2007, SHIP took steps to enhance consumer protection by establishing an independent Home Reversions Complaints Board. SHIP also set deadlines for advisers to hold equity release qualifications if they wished to work with SHIP providers.
Through tireless campaigning and confidence in the potential of the market, SHIP succeeded in removing one of the greatest hurdles challenging the growth of the equity release sector. Confidence also continues to be boosted by the growing numbers of SHIP members: 20 equity release providers are currently members of the trade body and thus honour the SHIP promises, which guarantees that clients will never face negative equity and will be granted tenure for life. Seeking independent legal advice is also insisted upon.
However, regardless of these steps forward, the market is relatively small compared with of the mainstream market. Between 2004 and 2007, SHIP figures witnessed modest growth of 2% from £1.192m annual plan value written to £1.210m. Yet appetite for equity release is growing, with the number of plans sold increasing 12% from 26,137 to 29,293.
Regulation has carved an opportunity for equity release, yet it is other factors unveiling against the backdrop of the recent credit crunch that will be responsible for its potential growth in the coming years. As the baby boomer generation reaches retirement, the possibility and appeal of equity release grows. This generation offers the market a pool of physically able and willing retirees who have seen the value of their homes rocket in the past 20 years and who are facing lower occupational and state pensions.
These potential equity release customers will be fuelling the market while mainstream mortgage lending plateaux.
Equity release pricing is based on a longer-term risk assessment than mainstream products, which mitigates any short-term money market fluctuations. Providers adopt a long-term view of the property market.
Hodge Equity Release, for example, which was created in 1965, can vouch for the changing nature of house prices during a client’s lifetime. And with many clients wishing to remain in their home, a slowing housing market will not affect their decision to proceed. In addition to this, the growing popularity of drawdown products also means that any fall in house prices can be buffeted, with few clients choosing to withdraw the full lump sum.
With most equity release business operating long term hedging to offset credit risk, funding is also not restricted within the market. This means rates have remained relatively competitive and immune to the upwards pressure on interest rates. A report from Defaqto highlighted the competitive edge these products hold against mainstream products, with clients paying an average of only 0.53% more for an equity release scheme than they would for a 10-year fixed-rate mortgage.
The credit crunch clouds are avoiding the equity release market, and with a level regulation playing field, increased potential among the baby boomer generation and the security and protection offered by these products, prospects for market growth look promising. However, if this market is to succeed, it is imperative that brokers identify the opportunity equity release has to offer and the importance of cementing a firm relationship between clients and product providers. An ever-ageing population means clients require a lifetime of advice and commitment. n
