With household budgets under strain, and interest rates rising, brokers admit clients in their 50s are finding remortgaging more of a challenge and some are seeking equity release as a way of keeping their home.
The Financial Conduct Authority (FCA) is concerned. In a ‘Dear CEO’ letter to equity release providers it said vulnerable consumers facing financial stress may be more susceptible to the purchase of unsuitable equity release products said it was seeing evidence the option was being targeted at younger borrowers.
Debt consolidation vs equity release
While there is increased interest, brokers said that they are not targeting younger borrowers, and claim those who use equity release have normally run out of options.
Will Hale, CEO of Key Later Life Finance, said it had seen an increase in the number of people using equity release to repay mortgages in recent years.
Hale said: “This is both a reflection of the challenges faced by older borrowers in accessing refinancing options in the wider residential sector and the growing attractiveness of modern equity release products.”
Paul Neal, mortgage and equity release specialist at Missing Element Mortgage Service, said: “To qualify for equity release you need to be over 55. Equity release should be a point of last resort when you have exhausted all other possibilities, there are many other products that are more suitable.
“However equity release can be a great product for those who don’t meet the criteria.”
Samuel Mather-Holgate, an IFA at Mather and Murray Financial, said the majority of equity release plans do not require financial underwriting or affordability assessments, because they are designed to last a customer’s lifetime.
“However, this lack of scrutiny could appeal to those clients who are finding it difficult to raise finance through a standard mortgage.”
Mather-Holgate said the FCA was right in raising concerns over the product, as there were “more appropriate solutions” for customers in financial difficulties, pointing to traditional debt consolidation or even a debt management plan.
He said advisers faced with borrowers in such a situation should guide them towards a debt charity such as StepChange, adding that it was important for customers to seek advice at the earliest opportunity.
Generation X, baby boomers and interest-only mortgages
Stuart Powell, managing director at Ocean Mortgages, said the rise in younger borrowers using equity release as cited by the FCA could also be attributed to the popularity of interest-only mortgages in the early 1990s.
“It is the FCA’s duty to spot trends in the financial services industry and act on them so it is not surprising that they have observed this trend. From my experience, lower aged borrowers aged 55-65 are enquiring about equity release for one main reason. They have often come to the end of their existing residential mortgage. This is logical as mainly 25-year terms were sold in the late 1990s.”
Powell said some of these borrowers have used the increased value of their property to secure more funding and are now struggling to remortgage.
“As equity release has no affordability checks and can be used as an interest-only mortgage – or no payments made – this feels attractive to those struggling to find a lender to allow them to stay in their home.”
High procuration fees
David Robinson, co-founder at Wildcat Law, said the availability of credit was starting to dry up for many people in their 50s just at the point they needed it. He said: “Having benefited from years of house price growth, many people are sitting on a tidy nest egg but cannot access using the more traditional loan or mortgage routes due to having to pay higher rates of interest and hence high monthly repayments.
“However, and it is very big, equity release may not be suitable for many of these people. For a start, many do not properly understand how they operate. The interest rates applied are often higher than standard mortgage rates and due to the interest rolling up on most products, borrowers can rapidly accrue significant debts on their property.”
Robinson also points out that some equity release products pay brokers higher procuration fees. “Whilst there is currently no evidence this is having an impact on recommendations, they (the FCA) is firing a very early broadside to warn any advisers tempted to profit,” he said.
Making borrowers aware of all options
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said he did not believe the FCA had a problem with equity release and younger borrowers. “Their concern is how many appear to recommend that option above all others; someone in their fifties still has access to lots of normal mortgage deals, plus there are now retirement interest-only (RIO) mortgages too. The FCA’s concerns, as far as I am aware, are that these options are not being fully explored before the recommendation of a lifetime mortgage is made.”
Dave Harris, CEO of More2life, said 29 per cent of equity release borrowers were believed to be under 65 years old. He said ideally borrowers should be encouraged to remortgage rather than take out equity release. “Younger borrowers are more likely to be repaying mortgages than older age groups so where possible, they should be encouraged to look at continuing to make these types of monthly payments.”
Aaron Strutt, product and communications director at Trinity Financial said equity release should be treated as a product of last resort when advising younger borrowers. He said: “Ultimately the regulator wants all financial options to be explored before locking into an equity release product.”
For advisers faced with clients who have run out of options, equity release can be a lifeline, so long as it is accompanied with the right advice.
Neal added: “Equity release can be a great product for those who don’t meet the criteria. Yes, it will erode much of the equity within a property but for those who are advised in it it is a great product. We are seeing many people who took interest-only mortgages that need repaying and no longer have the income to meet the affordability or those on a low income are using it to supplement their pensions. Done right it can relieve a lot of pressure to those who really need it.”
Hale pointed out that newer equity release products had more flexible features which meant customer could actively manage their borrowing creating the ability to mitigate the impact of compound interest – which has traditionally been one of the main risks of equity release.
He argued equity release was a well-advised product that was helping older borrowers from having to sell up.
“All responsible advisers will actively encourage clients to consider all their options whether it is using other assets to repay outstanding mortgages, equity release, downsizing or other later life lending products including RIOs. Our advisers focus on ensuring people understand all their options and the impact that choosing one will have now and in the future.”
