In its June report, Fitch Ratings expects the UK’s ageing population and the substantial equity locked in residential property to support increased equity release mortgage sales over the next five years, with almost 40,000 new equity release mortgages sold in 2017 and more than 600,000 people reaching retirement age in the UK each year.
The market for equity release mortgages has doubled in the three years to end-2017, reporting only last year a 41% increase in the number of equity release mortgages sold and just over GBP3bn of new plans written, representing 1.1% of the UK mortgage market.
A UK housing analysis conducted by Savills in April 2018 indicates that over-65s currently hold GBP1.6 trillion of equity in UK homes.
The UK firms Just Group and Aviva are well established in the market and own the largest equity release portfolios of all UK insurers, with GBP6.4bn and GBP7.8 bn of holdings respectively at the end of 2016. Other firms which are active in the market but with smaller portfolios are Liverpool Victoria, Canada Life, Legal & General, Rothesay Life and Pension Insurance Corporation, which entered the market in 2017.
An Aviva spokesman told Mortgage Solutions: “For many people in retirement the value in their home will be their largest asset – on average in the UK this is around five times the value of other funds built up in savings and pensions.
“Downsizing is one option available, but for many people this is not attractive as they may have a strong emotional attachment to their property and the memories built up there.
“In addition, their network of friends, family and social activity may be nearby, or downsizing may not release sufficient funds or may mean that they cannot accommodate the wider family for valued visits.”
According to Fitch, a key attraction of the equity release market for insurers is the fact that yields that can be earned on these loans are higher than those that can be achieved from traditional corporate bond investments, after adjusting for the risk of credit default.
This depends on the long-term nature of equity release mortgages, which makes the asset class less attractive to investors with short-term horizons but allowing life insurers with long-term liabilities to benefit from the ‘illiquidity premium’ by being able to hold equity release mortgages to maturity.
Further, high-yielding long-term assets may be interesting for UK annuity writers as the rates they expect to earn on their investments directly affects those they can offer on individual and bulk annuities.
Fitch does not typically treat equity release portfolios as ‘risky assets’ when assessing insurers’ investment and asset risk. This approach is driven by the conservative LTV ratios in insurers equity release mortgage portfolios, combined with the long average duration of these mortgages, which limits the risk for insurers of short-term falls in residential property values.
Equity release was widely offered in the UK in the 1980s by banks and financial advisers as ‘home income plans’. At the time, most loans were structured as home reversions with no negative-equity guarantees.
When financial and property markets fell, several policyholders lost their homes as a result. From then, the reputation of the equity release mortgage industry was significantly affected and recovered in recent years.