Why did we ever cancel our gym membership may be the first question, but for those of us working in the equity release industry, the next should be where is the lifetime mortgage heading? This year has been another record-breaking one for equity release and I believe we should all be immensely proud of the work we do to help the over-55s release their housing wealth. However, despite the success we are experiencing, it is vital that we don’t rest on our laurels and consistently review our products and processes.
A source of frustration
Louise Overton from the University of Birmingham and Lorna Fox O’Mahony of University of Essex, have recently called for more innovative thinking in the equity release market, and the advancement of new affordable and flexible products.
In their most recent report, entitled New Research on Consumer Demand for Retirement Borrowing, the academics call for a number of changes. They prefix their study by claiming that: “the one-size-fits-all approach to consumer protection in the current equity release market has been a source of frustration for some equity release consumers”. The report is very informative and many of the suggestions are perfectly reasonable, but the Equity Release Council has claimed the protections are essential to keeping the industry’s revival on track. So who’s right? Well, both are.
The Council’s chairman, Nigel Waterson, is correct to defend the importance of the no negative equity guarantee and all the other protections we have fought so hard to achieve; however, the customers we serve are now so varied in age, health, financial situation and general outlook that the consumer protections do not apply to everyone in the same capacity.
In my opinion, Nigel and the Equity Release Council are right to be keeping the train on the tracks, but to accelerate into the heart of the mainstream – something the Council and everyone else wants to achieve – we have to start thinking outside of the box and asking some difficult questions.
Time for a review?
The no negative equity guarantee is a protection that can, on the face of it at least, seem like a brilliant selling point to the lifetime mortgage. However, with the housing market in a state of near constant growth – averages are expected to smash through the £300,000 mark by the end of 2016 – we have to question how often the no negative equity guarantee comes into effect. So, perhaps it is time to review this guarantee as for some it is a needless add-on. Scrapping the no negative guarantee is, of course, a bad idea, but I do feel that following several years of consistent growth we may want to look at whether it has to be connected to every lifetime mortgage sold.
The report not only questions the no negative equity guarantee, but also looks into the effectiveness and allure of long-term fixed interest rates. The report states: “a further consequence of the Equity Release Council (ERC) standards is that all ERC-compliant lifetime mortgages carry a fixed (or capped) interest rate for the life of the loan. It may be that this particular product feature, which contrasts with the conventional mortgage market where there is limited demand for fixed interest rates in excess of 10 years, is also a potential barrier to greater product flexibility and increased customer demand”.
Understanding equity release
However, on this point, my opinion diverges. The information the report is based on may well be using old, higher interest rates, and that is no fault of the authors. However, today, interest rates are falling to historic lows and increasingly plans may well dip below the 5% mark in time. Secondly, I do not believe that fixed interest rates are a ‘potential barrier’, quite the opposite in fact.
Customers enjoy the peace of mind a fixed rate brings them and it also makes it a whole lot easier for advisers to make it clear what customers will owe in say five, ten or 15 years. In my view, the real barrier is understanding, but if we continue to discuss equity release with the help of reports like these, I’m sure that more people will understand the benefits, and more people will access their housing wealth.