Speaking at the Later Life Lending Event, Andrew Gilbert (pictured), products director, Legal and General Home Finance, said interest rates were “really up there as a key driver of both the state of the economy and I think therefore what we can do in later life lending”.
He continued that since October gilt rates had peaked at around five per cent and had come down around 100 basis points going into mid-January.
“I think we started the year in a really good position, we’ve seen quite buoyant business from advisers and we’ve seen rates that are very competitive, however, we really are dependent on interest rates, which is outside of any of our control,” he said.
He added that rates had picked up slightly since mid-January, and they may continue to go up in the near term but said that he hoped that it was “not a sustained position” for this year.
“We know that [increase] came on the back of inflation, which was 3.9 per cent and went up to four per cent and caused massive panic in the investment markets, but my personal belief is that the market was somewhat betting against Andrew Bailey and the Bank of England in what they believed was going to happen with interest rates this year.
“They were predicting three maybe four cuts from about May-time whereas the Bank of England was saying don’t expect cuts anytime soon, don’t expect it [cuts] in h1. I think the market was betting against it,” Gilbert explained.
He continued that data coming out around inflation, employment and retail sales hinted at a “bit more risk” and the “market hates risk”.
“It spooks the market in the short term. I hope that isn’t something that sustains and [gilt] rates do come down to the 3.5 to four per cent level as that will make…it a lot more attractive than if they’re four to 4.5 per cent and a half percent. So, my hope and belief is that that’s a blip and that the market will stabilise,” Gilbert noted.
Higher later life lending LTVs starting to return
Ben Grainger, partner, financial services, Ernst & Young, said that there was a “strong link between interest rates and the loan to value (LTV) the lenders are willing to offer”.
He explained: “That’s because if you look at it from an investment perspective, the higher the rate, the faster that mortgage rolls up, and the more likely you’re going to be exposed for the foreclosure on that property.
“So, what we’re seeing is as rates went up, the LTV started coming down a little bit, so that’s kind of one side of things making this product a lot harder for people to invest in. On the other side, the main investors and funders of the equity release market are insurance companies and as interest rates increase for insurance companies their ability to store liabilities has increased significantly, so it’s almost like we’ve got two opposing forces going on.
“[For] insurance companies and the investors in the space, demand has doubled but the amount of returns and the volume of that is shrinking.
He added: “We can hope that those things can offset each other to an extent, and we are seeing LTVs creeping up a little bit compared to where they were last year. “
Gilbert said that historically for funders, lifetime mortgages have had four benefits. This includes them yielding a greater return than a corporate bond, being relatively low risk, their ability to offer diversification against other default-based assets and long duration profiles.
“Now, from the funders’ perspective, the excess returns the low risk are probably a little bit more under pressure than they have been in the past. There’s slightly less upside opportunity from those, but diversification and long duration profiles remain true.
He said demand for annuity sales hit the highest they’ve ever been last year, certainly in living memory.
He added that there were also “bulk pension purchases” which was a “very buoyant market last year” and would likely continue in the next decade, and all this together means the “supply of funds to invest in equity release remains strong”.
“The benefits are still there, funders would still like a return on them and that’s been slightly compressed, but they’re still a good attractive asset, and as I say that diversification and duration point remains strong so it certainly should be a good year from a funding perspective to the sector.”
Grainger added that the “fundamentals of the market haven’t changed and therefore it should remain an area that insurance companies will want to allocate their resources”.
He continued the market was starting to see fresh thinking on the product and therefore creativity on the funding side of things.
“Innovation has flipped [towards] how can we innovate our funding models and our products to offer higher LTV to customers,” Grainger said.
