A host of brokers have told Mortgage Solutions that the pandemic has led increased numbers of families to talk about their plans for the future and explore how equity release could potentially address them.

Yet brokers have emphasised that it is essential for all advisers to include not only the older homeowners in those discussions, but also their family members.

Fears over family approval

A study by the advisory firm Boon Brokers has suggested that around one in eight (12 per cent) homeowners aged over 55 had been put off opting for an equity release plan because they were concerned their family would not approve.

This rose to 15 per cent in Scotland.

Part of this reticence appears to be a lack of understanding around how the plans work, with the study finding significant numbers of respondees were worried the plans would leave their children with debts to pay off.

Gerard Boon, founder and partner at Boon Brokers, noted that while some older homeowners feel the need to preserve the largest possible inheritance for after they’ve passed away, in many cases their loved ones would most benefit from that money now rather than years down the line.

He continued: “There are a lot of misunderstandings around modern equity release products in general and still a lot of suspicion. There’s no denying that when they were first made available, some products weren’t fit for purpose and mis-sold.”

Misconceptions about equity release

Andy Wilson, director of Andy Wilson Financial Services, said that while his clients are always encouraged to discuss their plans with their families, there are times when they choose not to, with the reaction of loved ones often a factor.

He argued this tends to be down to “unfounded concerns built around the common misconceptions about equity release” and a natural fear that “their parents are about to be ripped off”.

Wilson continued: “I can put the client’s minds and apprehensions at ease by explaining the current options thoroughly, the same can be done with family if I am given the chance. One question I sometimes use if the parent’s decisions are challenged is to ask whether the children might be able to help mum and dad financially, given they have a need for some cash? This tends to make the children re-think their opposition a little.”

He concluded that ultimately it’s down to his clients whether they want to keep their arrangements private, and he has to respect that, documenting their reasons for doing so.

Family members ask the best questions

Sami Bickford, managing director of The Equity Release Lady, said that her firm actively encourages clients to discuss their intentions with their family, but noted that “more often than not they have included their family from the very start”.

Family members are invited to be present during the meetings, with questions from everyone encouraged. Bickford noted: “Often the children or beneficiaries of our clients will ask the most important questions.”

Bickford added that if a client does not have the support of their children or beneficiaries when making a decision, then her firm encourages the client to invite a close relative, friend or simply someone they trust to be present as “we feel it is important they have someone to discuss their decision with, when they have left our office.”

Steve Wilkie, executive chairman of Responsible Life, said that family members are usually involved in equity release decisions by his clients, noting that would-be borrowers are encouraged to bring their families into the conversation at an early stage.

He continued: “The customer benefits greatly from that support and guidance. In fact, if someone else isn’t present for the fact find our advisers perform with a prospective customer, then we record that and actively encourage them to invite a friend or relative to participate.”

The role of the pandemic

The pandemic has played a part in shifting the perception of equity release, according to Bickford, with families having had more time to think about their financial plans for the future, research their options and get a better idea of how equity release actually works.

She continued: “After a very difficult couple of years, we are finding that families want their parents to take that holiday, move home to enjoy a garden, get that new kitchen. We hear very often: ‘We just want our parents to be happy, it’s their money’.”

Shifting perceptions

Stuart Powell, managing director of Ocean Mortgages, said it was very rare that his firm encountered clients who are reluctant to discuss the idea of equity release with their family, which he put down to both the improving reputation of the industry as a whole and the role of the pandemic on people’s perceptions.

He noted that his firm was seeing an increasing number of clients approaching him for advice, as they were looking to gift money to their loved ones, often for use as a deposit.

Powell added that involving the family in these discussions is important for advisers from a compliance perspective: “It is always a great idea to discuss equity release with parents and family as it is the children whose inheritance is likely to be affected by their parents taking out equity release.”

The Emerald range will give customers the option to repay up to 12 per cent of the initial amount borrowed annually with no early repayment charge (ERC). Additional direct debit repayments are permitted.

It is available for those aged between 55 to 95. Loans are secured on properties valued between £120,000 and  £2m. The minimum property value is £150,000 for ex-local authority properties and the maximum property value is capped at £1m in Wales and Scotland.

LTVs range from 29.5 per cent for those aged 55 to 57.5 per cent for those aged 82 and above. Cashback of four per cent is also available.

The minimum initial loan amount is set at £10,000, or £20,000 on cashback products with the maximum loan amount capped at £950,000.

Drawdown facilities are available along with arrangement fee-free options, downsizing protection and fixed ERCs.

The range has the same personalised pricing as its classic range, which the lender brought out earlier this year. It is based on loan amount, age, property value, property type and location.

Pure Retirement’s product head, Brendan Gilligan (pictured), said that the range gave consumers greater choice at the higher LTV end of the market.

He said: “With consumer confidence returning and many reassessing their retirement priorities, it’s more important than ever to be offering a range of innovative and flexible products that meet customer needs.

“The launch of the Emerald range builds on the innovation we’ve been undertaking throughout the year, by offering a comprehensive package of attractive features encompassing flexible optional repayment facilities, high LTVs, personalised rates and up to four per cent cashback.”

The lender added that it would plant a tree for each of the first 50 completions in partnership with the Yorkshire Dales Millennium Trust.

She said there were many ‘better value’ products on the market today, but ‘it remains to be seen’ whether the regulator will step up and intervene on behalf of these customers as it was forced to before in the mainstream mortgage market.

In an opinion piece in the Daily Mail responding to a case study covered by Samantha Partington, contributing editor of Mortgage Solutions, Blackwell (pictured) referred to the case of a Prudential lifetime mortgage customer, Jane Horton, who took out a gilt-linked lifetime mortgage worth £384,000 in 2008, to be hit by a £1m bill to clear the debt 13 years later.

The deal from Prudential which charged 6.87 per cent per month accrued £27,000 of interest in the first year and carried a £96,000 penalty for early repayment. The mortgage adviser took £7,120 in commission fees for setting up the deal.

Blackwell said: “The equity release sector talks a lot about how it has changed for the better, offering customers today fairer, more flexible and better-value products. But stories like that of Jane Horton shine a light on the poor-value products offered in the past, in which many thousands of customers remain trapped.”

She said the average borrower might struggle to understand the risks and costs associated with gilt-linked equity release early repayment charges.

“It’s a huge gamble for the borrower — and the adviser, too. They need to understand what’s likely to happen to interest rates and gilt yields and be prepared for the risk that it won’t necessarily end well,” she warned.

“It is a product much more suited to high-net-worth individuals or sophisticated investors, who can afford the downside, not older, potentially more vulnerable customers, needing to manage their finances carefully into later life.”

Blackwell added that quality of advice is key but said the regulator’s report into the sector’s advice and sales process does not make for ‘encouraging reading.’

“In too many cases, the FCA found that the advice given was not in the best interests of the consumer,” she said.

An Equity Release Council spokesperson said: “Lifetime mortgages are typically designed as long-term commitments that give customers lifelong guarantees and protection against interest rate rises, negative equity and the risk of repossession – typically until they pass away or move into permanent care. Regulated financial and legal advice make the benefits and costs of these protections very clear before anyone commits to taking out a plan.

“Today’s low interest rates and varied product range provide more options for existing customers seeking to switch to another plan. Initial adviser consultations can often be free of charge, and many advisers proactively contact existing clients with this in mind.”

The new business figure was up 23 per cent on £223.7m in H1 2020. The growth reflected higher retirement income sales, with £27m of origination “on behalf of a third party”, for which Just earns origination and administration fees, but holds no economic exposure.

The group said it would reduce the proportion of new business backed by lifetime mortgages to 20 per cent over time.

This came as its new business margin was impacted by tightening credit spreads, particularly on lifetime mortgages, arising from a rise in risk-free interest rates.

Just said it would continue focusing on pricing discipline and risk selection and, through distribution, target specific sub-segments of the market, such as shorter-duration loans to older borrowers, and borrowers with enough income to service interest.

Property price volatility

The disposal of seven per cent of its in-force portfolio formed part of a strategy to reduce balance sheet exposure to UK property, following regulatory changes in 2018.

The interim statement noted that a drop in residential property values could reduce amounts received from lifetime mortgage redemptions. As well, regulatory capital needed to support the possible shortfall would rise if values fell.

On the other hand, if prices grow significantly, this could increase the number of early redemptions, resulting in higher cashflows and consequential reinvestment risk.

Just already sold a portfolio of loans secured by residential mortgages, with a fair value of £600.8m, in December 2020.

The upcoming sale was likely to result in a “circa £125m net of tax loss”, the company said.

Just did not pay an interim dividend, saying it was “lead to a degree of caution” by possible effects on the economy of the upcoming withdrawal of government pandemic stimulus packages.

Caution was adopted even though the company made significant progress building its capital base to accommodate regulation on equity release mortgages, and continued growing underlying organic capital generation, in H1. 

The group held £7.9bn of investments in lifetime mortgages as of 30 June, down from £8.3bn at the start of the year.

The average loan-to-value ratio of the mortgage portfolio was 35.9 per cent. 

The amount of new equity released rose by 32 per cent to £1.94bn, up from £1.47bn in H1 2020.

The average customer took out £94,982, up 34 per cent from £74,014 in H1 2020.

We have certainly noticed this massive increase over the past six months. 

When one of our team, Nadine, ran into my office last month with an excited look on her face saying, “I have a lady on the phone who wants to borrow £7m,” half of me thought it was a wind up. 

I took the call and spoke to a lovely lady who lived in a £25m property and had a first charge mortgage coming to the end of its term later this year and a second charge loan which expired next year.

The well-worn phrase “property rich and cash poor”, could have been created for this lady and her husband. They had a fantastic home which they had lived in for many years but no assets and limited income.

No residential lender would look at the case. However, several lifetime mortgage lenders were keen to speak with their funders to see if they could help.

As the clients had lived in the property for many years, loved the location, land and gorgeous home they had built, they really did not want to downsize. At the time of writing, I am still awaiting two lenders to come back to me once their funders have considered the application.

The Equity Release Lady

We have built a good reputation in the industry, so higher net worth clients do tend to approach us. Our average loan has always been around £200,000.

Due to the high number of enquiries we are seeing across the country, we have started new company The Equity Release Lady to sit alongside Ocean Equity Release to cope with the high demand. The companies will both operate a franchise model, which means that wherever clients live, they will be able to get advice from a qualified adviser supported by our team.

The new company will be run by Samantha Bickford as managing director. Samantha’s view is that, with demand for lifetime mortgages at the upper end of the market growing rapidly, and with independent financial advisers increasingly considering clients’ property as part of their holistic advice, business will only increase.

I agree. I’ve never known so many lifetime mortgage enquiries where the client’s property value was as high as they have been this year, or where they wanted to borrow as much.

Careful underwriting is crucial

Cases we’ve seen this year have included clients wanting to borrow £1.4m, £703,000 and £700,000.

All these were clients remortgaging at mortgage deal-end. As well, purchases using loans of £337,000 and £314,000, and a £330,000 loan for a payment as part of a divorce settlement. Reasons for borrowing are varied but increasingly high value remortgages, inheritance tax planning and divorce settlements are featuring.

The future looks bright for the lifetime mortgage industry.

However, it does seem that the higher the loan amount, the more difficult it is to place. As lending for equity release is based on loan to values, and funders are quite risk averse, finding the right deal for these mega-loans can prove quite tough.

With fewer than 10 lifetime mortgage lenders operating currently, and although the number of available products has increased, more flexibility and an ability to underwrite each case on its own merits will become crucial for market growth to continue.

That is certainly a credible picture to paint, and it’s clear that homeowners are now much more likely to be aware of equity release and the options it provides.

That said, further research from SunLife reveals this is by no means universal, and I would probably suggest that for every new client we have that is taking out a later life product, we have thousands upon thousands of older homeowners who are effectively in the dark when it comes to the options available to them.

The research revealed that, of a survey of 1,000 over-50s homeowners, nine out of 10 were (at best) unsure of how equity release worked, with common misconceptions coming to the fore around how it might mean they lose their home, not knowing the cash lump sum was tax-free, and believing children might be liable to pay off any debts somehow left behind.

Education, education, education

So, even those who are clearly in the potential borrower demographic for equity release need educating on the possibilities, the actual key parts of the product and what it means for them, and the roadmap through to advice.

However, I’m also very much of the opinion that this is not a solution purely for one type of homeowner – those living in high-value homes. From my perspective, later life lending need is pretty much classless in that there tends to be a requirement across all types of homeowners.

I’ve talked a lot in the past about how incomprehensible it is to me that we have pensioners sitting in properties worth hundreds of thousands of pounds feeling they can’t put the heating on when they need it because it costs too much. Or who are putting up with a standard of living far below what they could actually afford if they were provided with advice where they could access that equity.

By the same token, I absolutely get the growing draw towards later life lending/equity release from those living in much higher-valued properties who, for example, want to access their equity to help children with their own deposits or want to carry out renovations, or indeed want to use that money for experiences, new cars or holidays.

Paying for care

And then we have those who may simply want to utilise their equity to supplement their pension provision, or to ensure they can afford for long-term care needs for themselves or their partners.
In a way, equity release or later life lending can provide a solution for older homeowners who sit at all levels of income and housing wealth, who have a variety of needs which range from the basic to, what some might describe, as opulent. That in itself is the beauty of these products, that with the right advice of course, they can be used to provide for any number of client needs.

However, perhaps the biggest opportunity for advisers in this space is the sheer number of homeowners who simply don’t know what they don’t know; who have a need but no understanding of what they could achieve, or that their greatest fears about equity release/later life lending are simply unfounded. There lies the big opportunity for our sector and one that if we can focus on is likely to drive significant business growth for all.

The educational syllabus offers three pathways based on advisers’ levels of experience, designed to guide their development journey by benchmarking their knowledge and skills as well as signposting materials to support their progress.

The Council worked closely with specialists across the sector to produce six modules which have each been piloted in the field. It said the modules encompass all areas needed to advise consumers effectively and focus on understanding the industry, market, clients, soft skills, products, and processes.

Click here to access the modules.

Donna Bathgate, chief operating officer of the Equity Release Council, (pictured) said: “Property wealth is increasingly part of consumers’ thinking when they make later life financial plans, so it is vital to ensure the service they receive is of a consistently high standard as the market grows.

“The potential for unlocking property wealth should be on every homeowner’s retirement checklist to consider alongside appropriate advice to weigh up all the options and implications. The competency framework is the Council’s latest initiative to help firms and their advisers develop a 360-degree view of today’s market and ensure the best possible outcomes for consumers.”

And the other industry contributors for sharing their knowledge and experience to benefit the wider advice community.

Alice Watson, head of marketing, Canada Life Insurance, said: “As the market continues to evolve, we are proud to have been involved in developing this framework with the Equity Release Council from the beginning and look forward to seeing it develop over the coming years.”

In the last 12 months, the trade body has supported advice standards in a raft of ways, including updating its checklist for advisers and publishing an updated good practice guide. In 2020, 100 advice firms joined the council as its adviser membership grew by 35 per cent to 448 organisations.

Dr Louise Overton, from the School of Social Policy at the University of Birmingham said in an Equity Release Council (ERC) report out today that lifetime mortgages could play a key role in funding care and a lifestyle at home, instead of waiting for escalation to critical needs.

“Most older people live in mainstream [housing] so there is an opportunity for the industry and government to send a clear message that equity release offers a (partial) solution here. Indeed, the Universal Deferred Payment Scheme applies only to care in an institutional setting, so commercial equity release products may be more aligned to older people’s preferences for ageing in place, and to achieving the Government’s aspirations of transform[ing] the social care system to focus on prevention and the needs and goals of people requiring care,” she said.

Mind the gap

Overton said the gap between the expectations of policymakers who think the elderly should fund their own care and the preferences and practices of elderly people must be bridged. The lack of trust between stakeholders like financial advisers and local councils was another obstacle, she said, when each party wanted the same outcomes but couldn’t bring themselves to work together.

She said: “Local authorities were often reluctant to signpost self-funders to financial advisers who could offer a range of funding options, due to the fear of liability for poor advice, and financial advisers saw local authorities as a source of misinformation, not acting in clients’ best interests.”

She added: “A much greater level of cross sector trust and awareness is therefore required if the potential for equity release to play a role in meeting social care costs is to be achieved.”

She concluded: “We found little evidence that reluctance to pay for care using housing equity was rooted in strong support for inheritance, or in cultural attachments to the owned home. Rather, perceptions of unfairness were associated with intragenerational disadvantage for responsible saver-citizens who had ‘done the right thing’, by paying taxes and mortgages.”

Desperation to stay in home

The 24-page Equity Release Council report also revealed the lack of thought and knowledge about future care needs, although a survey revealed 67 per cent of over 50s are still determined to stay in their own homes fearful of residential care homes post-Covid.

The ERC’s report, Solving the social care funding crisis: perspectives on the contribution of property wealth, published with Pure Retirement and My Care Consultant, shows the pressures of the pandemic have left a majority of UK adults concerned that care is too expensive, lacking in public funds and not fit for purpose.

Three in five over-50s say they are fearful of having to move into residential settings and the determination to receive care at home grows stronger with age, rising to 76 per cent among over-70s.

The findings also show over one in five didn’t know they have to contribute to social care costs in later life and half of the adult population have not considered how they will pay for long-term care needs, with 18 per cent making no provision at all.

Government has debated a range of care funding solutions over the last decade, including caps on care costs, a social insurance fund, a National Care Service and higher taxes.

Last week the Government published its blueprint to integrate health and social care services and has pledged to bring forward proposals for broader social care reforms this year.

Cross-section of views

The Council’s research suggests nearly half of UK adults feel state funded care should be available for everyone to access, up to a certain point, with the option to top this up using their own finances. Meanwhile, 40 per cent believe care should be completely free at the point of use, while four per cent believe care should be completely self-funded.

The findings also highlight that under the current system:

• 5.5m people and their families have had to use their own income or savings to pay for a parent or elderly relative’s care
• 4.6m  have had to provide care within the family due to financial pressures
• 4.1m people and their families have had to sell a parent or elderly relative’s home to pay for care needs
• 4.0m have had to compromise on low quality care for a parent or elderly relative because they could not afford any better.

David Burrowes, chairman of the Equity Release Council, said the country is crying out for a care funding plan that is fair for all and sustainable in the long-term.

“We welcome the Government’s commitment to progress social care reforms this year to help people live independent lives for longer. With this issue firmly back at the top of the agenda, we urge Government to bring forward solutions that can make state-funded care available to all, up to a point, with people using their own funds and assets to top this up where needed. We also need to ensure that care provision can support people’s desire to have their needs met in the sanctuary of their own homes.”

Claire Singleton, CEO of Legal & General Home Finance said the cost of residential care varies by more than £800 a week depending on location: “Property wealth can be an important asset that many families will naturally turn to and our research has shown that the value of homes locally will most likely correlate with the amount people entering residential care can expect to pay locally. On average, people can [also] expect to pay more than £800 a week for private residential care, which is more than double the average weekly income for people in retirement (£320), according to the Department for Work & Pensions. As the ERC’s research shows, the cost and complexity of going into residential care can leave some people hesitant as to whether it is an appropriate solution for them,” she added.

Will Hale, CEO at Key said: “We need to educate people about their choices and how these might be financed. 4.1m people and their families should not be forced to sell the family home in order to pay for care but encouraged to seek specialist advice around how their assets, including housing equity, might best be used to provide them with the care they want and need throughout the stages of later life.
“Whether they want care at home, to move into a sheltered community or into residential care, we need to build a system that combines public and private finances to better facilitate that choice.”

See the full report here.

In H1 2019, the value of mortgages arranged by the club was £36bn.

The scale of the housing market lockdown was also indicated as the surveying services arm of L&G carried out 185,000 surveys and valuations during the period compared to more than 250,000 in H1 2019.

Falling lifetime sales

The impact of lockdown and the uncertainty brought about by the coronavirus pandemic also affected the group’s volume of lifetime mortgage sales and annuities.

Lifetime mortgage sales fell year-on-year by 26 per cent from £489m to £362m. Sales of annuities also decreased from £489m to £421m year-on-year.

In its H1 update, the group said global disruption following the outbreak of coronavirus had caused a temporary dip in demand for retail retirement products, but it did not expect this to alter the long-term direction of growth for this market.

The physical restrictions of lockdown, said L&G, had driven it to improve its technology which made it easier for customers to access its products and has seen demand rebound in June and July.

“We are actively seeking solutions to address the needs of the 1.5 million UK workers aged over 50 who report that they intend to delay their retirement as a direct result of the pandemic,” the group added.

“Tragic” impact

Covid-19-related claims and a future provision for such claims has cost Legal & General £80m but it said the “tragically disproportionate” impact of the pandemic on older people has meant a reduction of £32m in the group’s retirement payments.

L&G’s profit after tax slumped by 67 per cent from £874m to £290m year-on-year. Operating profit fell by six per cent from £1bn to £946m as L&G took a £129m hit from the impact of coronavirus.

Despite the blow to the group’s profits, L&G said the business continued to perform resiliently, and reported growth in three out of five of its divisions.

The group will pay the same dividend of 4.93p per share as did it last year.

Nigel Wilson, group chief executive, said: “In H1, Legal & General delivered resilient operating profits, a robust balance sheet and highly relevant products and services. Our ambition is for a similar performance in H2.

“We kept all our employees on full pay, executed significant commercial and investment projects, and continued to provide a reliable service to our customers without any government financial support.

“We are committed to driving forward an investment-led, climate-friendly Covid recovery incorporating the very best aspects of inclusive capitalism.”

This week, Simon Little, managing director of Autumn Life Retirement Solution, added an insightful and thought-provoking response to Equity release is heading into the eye of a ‘perfect storm’ – Blackwell.

He wrote: “I have to admit I’m struggling with this article from Linda. I’m not sure what the point of the article is other than to saber rattle that equity release is likely to be the next big mis-selling scandal, which I don’t believe it will be.

“To say lifetime mortgages are expensive is nonsense in 2020.

“I’ve just looked at some products currently available with interest rates fixed for life at 2.65 per cent.

“At these rates it takes 27 years to double the size of the original loan.

“Assuming zero house price inflation it is highly unlikely that the loan will erode all of the equity particularly given the low LTV to start with for borrowers aged 55. These products look exceptionally good value to me, with the possible exception of the complex and potentially expensive early repayment charges.

“The Financial Conduct Authority (FCA) has recently announced it is to investigate the later life lending market to ensure it is working as it should be and in the best interests of the customer. This should be welcomed and I hope the regulator cracks on with this asap.

“So here is the nub of the issue, isolating lifetime mortgages and badging it as the sole solution solution for releasing equity fails to recognise the shifting dynamics at play across the later life lending market. I.e. it excludes resi-mortgage options which I believe account for in excess of £25bn of sales to the over 55’s, making the total later life lending market of >£30bn of which lifetime mortgages account for just 13 per cent of sales for 2019.

“If one of Linda’s points is the industry needs more advisers providing advice across the later life lending space than I agree. One initiative that could accelerate this growth would be for the regulator to look at merging the MCOB rules for lifetime mortgages and residential mortgages where advice is provided on a borrowers’ ability to repay or not as the case may be.

“As for using housing equity to resolve someone’s future long term care needs, then I would suggest this is limited as current rules apply and I’m not sure this is in the interest of many who wish to pass on housing wealth to the next generation.

“In short I don’t believe lifetime mortgages will be a mis-selling scandal and perhaps as an industry we should be championing the huge benefits such products afford clients to live a full and enjoyable later life.”