Equity release mortgages only contribute a minor percentage of gross lending in the UK, but there are many reasons to suggest it is a market that will grow. From lenders, distributors and funders’ perspectives, this is a sector that should provide decent profitability to all and a happy, compliantly sold, customer to boot.
In 2014, gross lending for equity release reached circa £1.4bn. What was noticeable was the number of companies both researching and looking at entering the market, an example being Pure Retirement who successfully launched last year and are ahead of all lending targets.
But what is it that makes this product so attractive for all the links in this product chain? Let’s start with funding.
The market has traditionally been funded by annuity providers using equity release lending to generate a high margin rate of return and, to an extent, provide “guaranteed” investment returns. An area that we are yet to see the full impact of is the pension reforms implemented this month. The market can expect a revitalised range of equity release products funded by new entrants, from pension funds through to funding lines looking at mixing up their appetite for risk verses returns. The reliance on annuities as the main funding vehicle for equity release will probably become obsolete.
Distribution is the next consideration. Most equity release players rely on a mainly intermediated business model with both IFAs and tied distribution models generating the majority of start-ups in this sector. From an IFA perspective this is almost a “perfect sale” in that equity release generates a good procuration fee, but it is well-earned as the amount of face-to-face contact both with the borrower and relatives, is more than a traditional house purchase or re-mortgage.
That said, any IFA that has looked after its clients for many years will have broached the subject of retirement planning and, in this day and age, equity release should have been part of that conversation for clients running up to age 55.
One of the benefits of equity release products is their simplicity. They are usually offered on a fixed rate basis with redemption penalties either linked to gilts or more traditionally with the charge declining each year over five years – all easily understood and transparent. Also on the plus side, pricing now often includes protection for the borrower against negative equity at the end of the term, which was traditionally one of the perceived risks for borrowers.
Finally, there is the lender angle. The technology supporting the sale, processing and then servicing, needs to be reliable and compliant, but not over the top in areas such as automated decisioning, so that it can be implemented at reasonable cost. Post completion staffing is kept relatively streamlined with servicing technology generating statements, leaving staff to proactively deal with changes in circumstances in the highly customer centric way required when dealing with the typical demographic of this type of borrower.
All in all, I see 2015 being a year of significant growth in equity release (probably reaching over £2bn), and rightly so for all concerned in distributing and lending this product. Intermediaries quite rightly get paid well to do a great, compliant job; funders get a good rate of return on their investments over a long period of time; and lenders are able to get into the market with reasonable capital expenditure combined with low post completion activities, unless a borrower’s circumstances change.
From the borrowers’ perspective, should the circumstances be right, they can release cash that can make a real difference to their retirement.
If you’re an intermediary, funder or lender, this is the year to seriously look at this product as those who don’t, could miss the boat in a market with mass potential.
