Market conditions have meant the UK mortgage market is being forced to adapt and change to allow for more difficult times ahead. Brokers complain lending criteria has tightened and product design has become more restricted, but the most noticeable difference is actually the heavy reduction in actual numbers of products available.
Yet the same cannot be said of the UK equity release market, where due to the nature of product design and market funding, growth of the sector is predicted going forward.
Unlike the UK mainstream mortgage market, equity release has two protection mechanisms working in its favour: long-term outlooks and a variety of funding options, including annuity-backed funding. In this respect, the market is not directly linked to traditional money market sources and liability is reduced by long-term borrowing. This is in stark contrast to the Australian equity release model, which has relied on securitisation and consequently has seen the number of lenders drop by almost half.
For a number of equity release providers, the use of pension annuity-backed funding removes the sector from the direct impact of the credit crunch and offers a close match to the model employed in equity release lending itself. In this arrangement, purchase money for a person’s retirement is paid by the annuitant in exchange for a continuous pension from the provider. This purchase money can then be used by the provider to fund equity release loans, which are repayable and the initial loan is returned to the provider with additional interest when the client dies. This long-term investment strategy matches assets and liabilities with the life expectancy of both equity release client and annuitant similarly aligned.
The cost of long-term funding is more stable than short-term funding and is reflected well when the Libor rate for 20 years is compared with the rate for three months. This stability has also offered equity release providers benefits that can be passed on to their clients in the form of competitive rates and stable product provision, which are largely unaffected from short-term fluctuations and interest rate changes in the mainstream money market.
A report from Defaqto earlier this year 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. Companies who also operate reversion business have additional liquidity through the sale of properties during many years, which only serves to increase stability. The protection of the equity release market is also enhanced through the continuing demand for such products. With the housing market slowing and sellers often unable to sell their homes, equity release offers an alternative to downsizing. SHIP members also guarantee tenure for life for all clients. Another factor that results from increased demand and in itself has the power to fuel future applications is product flexibility and innovation.
However, the recent Which? report claiming that equity release schemes should be a last resort for homeowners due to supposedly expensive and inflexible plans, only goes to show the lack of knowledge about the options available for clients. In the past few years, great strides have been made by providers to create products that suit their clients’ changing needs and if growth in the sector is to continue it is important that the industry and trade bodies shoulder the responsibility to educate the general public.
Providers must be prepared to respond to any knock-on effects from mainstream volatility. With the half percent cut in the base rate redemption costs will rise and advice from intermediaries could not be more important. n
Jon King is managing director of Hodge Equity Release
