The evolving role of equity release
By Rob Miles, Head of IFA Sales, Legal & General
No longer niche.
Equity release is a hot topic. No longer a 'last resort' option considered only by a small number of niche advisers - it now represents almost a third of later life borrowing. A record £2.15 billion was unlocked in 2016. Measured by the value of lending, the market has almost trebled in size in the last five years1.
An adviser recently confided in me that his peer had once 'turned their nose up' at mention of equity release. It had taken some persuasion that her wealthy clients could ever be in the market for such a product. As a convert himself (one of many driving an explosion of growth in the market) he is surprised at the lack of awareness of how far these products have come since their once "grubby" old image.
Increased regulation by the Equity Release Council means that products are more customer-friendly than ever before and offer increased protection for homeowners. However, some myths remain. In 2015 the Financial Conduct Authority (FCA) suggested that equity release - once "a dirty word" - still had problems with its public image2.
There is clearly still some 'myth-busting' to be done.
It's not right for everyone but for some it can offer an ideal solution to their retirement cash needs. Oh, and wealthy people do it too. For some, it makes good financial sense.
This adviser is just one of the 'new' enthusiastic converts to the market. In my role I see advisers from all walks of life - residential mortgages, wealth and general retirement planning. There is lots of interest in equity release. It's part of my role at Legal & General to bridge that knowledge gap and support advisers 'getting started' whatever their background.
The facts are that:
- With a lifetime mortgage (equity release), your client could release some of equity that's tied up in their home - tax free.
- It creates a debt against their home. The loan is repaid when the last remaining borrower dies or moves out of their home into long care.
- The client retains ownership of their property.
- Interest is added to the amount owed each month, so interest is charged on the loan plus any interest already added. This means the amount owed grows quickly, reducing the equity in the property and the value of inheritance.
- Inheritance Protection and Negative Equity Protection offer further security for homeowners and their beneficiaries.
- The advantage compared with a residential mortgage or traditional loan is that there is no monthly payments. There may be cheaper ways to borrow.
Equity release can offer a further choice and more opportunities
So what is driving this growth?
If an Englishman's home is his castle, then increasingly, it's also his piggy bank. House prices have increased at a rate 42 times that of inflation since the 1970s. To put that in context, if a loaf of sliced white had risen at the same rate you'd be paying almost a fiver for your daily bread!3
Low interest rates mean that money in the bank isn't rising in value nearly as fast. If you bought your home 30 years ago, it's entirely possible you'd have more equity in your home than in your savings account or even pension combined!
But, unlike cash, bricks and mortar cannot be so easily spent. Some people upon retirement will opt to downsize or move to a cheaper area. For those comfortable and happy in their lifelong homes surrounded by familiar faces - this will be a less palatable option. Equity release offers a further choice. A choice to stay put. To stay living in your home... or even, a better home!
63% of Adviser have helped a client use equity release to fund home improvements. That could mean adaptations to ensure a mobile old age or it could be a fancy new kitchen. It could mean a new conservatory or loft conversion. For some, it could mean the difference between staying in their own place or moving to a specialist care home. For others - it's an opportunity to splash out and 'make the most' of their existing property.
House price growth creates other considerations too. For many young people, the possibility of owning their own home is fading. Wages are not rising in line with house price inflation. Sky-high rents mean that saving a deposit is difficult.
More than half of the Advisers that we spoke to had facilitated homeowners giving money to family members. This will have included grandparents gifting money to their grandchildren to enable them to buy their own home. For many, this is not only an act of altruism - it is a sensible tax planning strategy.
As it stands today, money gifted to family seven years or more before death could avoid hefty inheritance tax4.
The hard-nosed and softies alike benefit. The hard-nosed financiers among us benefit from a tax efficient inheritance strategy. The softies get to see the grandchildren settle down into their new pad. It's a win, win situation.
Long term care, later life divorce and managing monthly debts are also ways in which the product is being used to help people in retirement.
The Equity Release Council is predicting strong growth in 2018*. It's an exciting time for advisers in the equity release business. Continued growth will depend on a number of factors - house price growth , consumer confidence in the products and sustainable interest rates for continued affordability loans.
One additional factor is of course; who will advise on equity release? To expand the market we need to expand the base of advisers qualified and able to advise on these products.
Are non-specialist advisers ready for this opportunity?
In July we asked 344 Financial Advisers - experts in residential mortgages, pension planning and investments - about what they thought about lifetime mortgages. We found that a whopping 69% of respondents are already advising or referring clients for lifetime mortgages as part of their day to day business.
It was clear that many felt unprepared. Some felt daunted by the qualifications and specific knowledge required to advise their clients. Others were unsure how to identify the best clients for equity release or how it could be helpful. There is clearly a learning curve for both consumers and advisers to benefit fully from the opportunities of equity release. However, the financial incentives as the market grows will no doubt encourage more advisers to get to grips with the topic.
1Equity Release Council Market Report Spring 2017
2Financial Reporter April 2015, noted that at an FCA Mortgage Conference, Christopher Woolard, Director of Strategy and Competition, admitted that "in the not too distant past, equity release became a dirty word".
3Shelter: Food for thought: applying house price inflation to grocery prices, February 2013. Sliced white loaf would cost £4.36.
4Inheritance Tax, Gov uk. https://www.gov.uk/inheritance-tax/gifts