Is the equity release market poised to bounce back this year after rising interest rates choked consumer demand in 2023?
Brokers certainly think so. Although there has been no shift on interest rates this year, many advisers are seeing an uptick in equity release enquiries.
“We’ve had more enquiries in the past three months than in the past year,” says J Finance managing director Rowan Frayling, whose advice firm anticipates more activity in this sector in the year ahead.
Hybrid options blending interest with traditional equity release are widening market appeal
PAB Wealth Management director Luke Thompson agrees. Higher interest rates, and a corresponding increase to the cost of lifetime mortgages, caused some older homeowners to put plans on ice last year, he says. But many are now seeking more information about product options.
“There is definitely more interest in equity release today than there has been at any time in the past 18 months,” he says.
Key Advice managing director of internal advice Chris Bibby says lending demand last year was particularly subdued from customers looking to release funds for more discretionary spending— be it home improvements or gifts to family. But he expects to see demand from this cohort bounce back if the Bank of England reduces rates in the second half of the year, leading to more competitive pricing across the sector.
Market slowdown
Brokers agree that a turnaround is needed, with figures from the Equity Release Council (ERC) showing the extent of the market slowdown last year.
Just 26,000 new lifetime mortgage plans were taken out in 2023 — a fall of nearly half (47%) from the year before. There was also a 31% decrease in ‘active’ customers — which included those extending their existing borrowing facilities.
We shouldn’t lose sight of how far the market has matured since activity was last at these levels
Overall, total lending fell to £2.61bn — a significant drop from the record-breaking £6.2bn lent in 2022. This is the lowest total lending figure for eight years.
Low lending volumes aren’t due just to fewer customers. Those taking out a lifetime mortgage last year typically borrowed less. The average new lump-sum equity release plan was £97,878 last year — down from £131,687 the year before.
Higher interest rates have led more people to opt for drawdown products, where funds are accessed in stages and interest is accrued only on withdrawn funds. ERC data shows that the majority of lifetime mortgages arranged in 2023 were done so on this basis. In contrast, the majority of plans in 2022 were lump-sum lifetime mortgages.
ERC chair David Burrowes agrees that the profile of the average customer has shifted in the past year, with fewer people borrowing for more “aspirational reasons”.
Bibby says two distinct customer cohorts are emerging. The ‘core heartland’ is typically people in their late 60s and early 70s, looking to release a large one-off payment to boost retirement funds or help their family. Alongside this is a new group of ‘younger’ borrowers — aged 55 to 64 — who are looking for help with mortgage borrowing, managing monthly budgets or reducing debt.
We need to educate customers about later-life borrowing options as opposed to letting them worry, and sometimes panic, about their financial future
Brokers say lending to the second group has remained steadier in the past year, due partly to product innovation but also to residual need — with the cost-of-living crisis exacerbating the financial problems that are prompting some to look at equity release options.
Product innovation
In the past six months several lenders have launched payment-term lifetime mortgages (PTLTMs). These help customers reach a higher loan-to-value ratio than that of a standard lifetime mortgage, enabling them to release more money from their property — useful for those looking to repay significant existing debts.
The loans require borrowers to make mandatory repayments until their 66th birthday. (For couples this will be until the elder of the two reaches that age.)
After the age of 66 the product transitions to a standard roll-up interest lifetime mortgage, although customers can continue making repayments if they wish to. More2Life’s PTLTM, for example, allows customers to repay up to 10% of the amount borrowed per year without penalty.
For growth to really return to the sector, we need to see a step change in collaboration between mainstream mortgage advisers, IFAs and specialist later-life lending advisers
Significantly, these mortgages require more stringent credit assessments to ensure customers can meet the mandatory payments. If customers fall behind, they risk losing their home.
Another innovation is the ‘interest served lifetime mortgage’, also known as an ‘optional payment lifetime mortgage’. Here, the customer agrees to make ‘programmed’ interest payments, with the aim of reducing the total cost of borrowing over the full term of the loan. This could be a more attractive option in the current market, with higher interest rates and little growth in property prices.
Standard Life offers one such product, with the additional feature that customers get a lower interest rate if they commit to regular repayments. The discount can be up to 0.75%, depending on how much is repaid — and may help the product’s appeal in the current higher-rate environment.
These voluntary payments do not require the same level of credit affordability checking as that of mandatory PTLTMs, and the customer receives a guarantee of tenure to stay in their home until death or moving into long-term care, as with a normal lifetime mortgage.
Customers need to be effectively advised as they go through their life stages from work and into retirement
“This type of innovation is good for the sector. However, these products serve only a small demographic,” says Mortgage Advice Bureau proposition director Steve Humphries.
Both products are typically aimed at the younger cohort of equity release customers, in the transitional phase between mainstream and lifetime mortgages — a smaller group but one that may become more significant.
Brokers would like to see even more product innovation in this space.
Finova sales director John Tilzey says: “Hybrid options blending interest with traditional equity release are widening market appeal. I anticipate variations in early repayment terms, to make it easier for customers to pay more off their mortgage balance without penalty; and innovation through the integration of long-term fixed-rate lending with equity release products, creating another hybrid product variant.”
Adviser rethink
Many in the industry also want to see advisers rethink their approach to equity release and lifetime mortgage products.
Bibby says: “For growth to really return to the sector we need to see a step change in collaboration between mainstream mortgage advisers, IFAs and specialist later-life lending advisers. Customers need to be effectively advised as they go through their life stages from work and into retirement.
This is a growing and developing sector, and it’s in all of our interests to ensure customers always get the right outcomes
“Advisers must have comprehensive conversations with customers about all available product options as they go through these phases.”
This may include standard mortgage products, retirement interest-only mortgages, PTLTMs and traditional lifetime mortgage options.
“This isn’t happening enough now,” says Bibby. “Irrespective of their entry point into the market, a customer must be able to access a wide variety of mortgage options or be signposted and referred where appropriate.”
The profile of the average customer has shifted in the past year, with fewer people borrowing for more aspirational reasons
Humphries agrees: “We see customers coming off interest-only mortgages with no repayment vehicle, or even standard repayment mortgages ending, and suddenly having no understanding of what their options are.
“As an industry, we need to educate customers about later-life borrowing options as opposed to letting them worry, and sometimes panic, about their financial future. Firms need to ensure they’re talking to customers about all the options available. Too often we hear about customers ending up with a lifetime mortgage when no other suitable options have been fully discussed.”
Regulators too are acutely aware of this issue. In September last year, the Financial Conduct Authority issued its key findings from multi-firm work on later-life mortgage advertising and advice. One of the areas highlighted was that firms were “steering outcomes in favour of lifetime mortgage products”.
Humphries says: “This has hopefully prompted firms to look at their sales processes to ensure all relevant options are being fully considered. This is a growing and developing sector, and it’s in all of our interests to ensure customers always get the right outcomes.”
We’ve had more enquiries in the past three months than in the past year
The mortgage market faced a tough 2023 and equity release was no exception. But increased housing market activity, property prices edging up again and the real prospect of an interest rate cut mean many are optimistic for a better year ahead.
Burrowes says: “We’ve grown accustomed to stronger demand [for equity release] in recent years and we shouldn’t lose sight of how far the market has matured since activity was last at these levels.
“New product features and customer protections mean we are well positioned to serve the inevitable demand that will come as confidence returns.”
This article featured in the April 2024 edition of MS.
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