Having worked in the equity release industry for many years, there has never been as much optimism in this sector as there is currently. Against a backdrop of reductions and barriers to lending in retirement, the equity release marketplace is expanding faster than most other areas of financial services.
Equity release holds the greatest number of reasons why the over 55 age group are now considering equity release schemes.
So why now & what are the reasons?
Firstly, it looks like 2015 laid the foundations for the recovery of the equity release market. A record £106 billion equity release lending took place, which was a 10% increase on the previous year and this takes us back to the equity release days of 2006. But the numbers do not explain the underlying reasons, only the resultant effect. I believe the huge growth in demand is down to a number of factors.
- Baby Boomers – Primarily there are a record number of so called ‘baby boomers’ who are reaching retirement age. It is estimated that up until 2018 record numbers of up to 700,000 people will turn 65 each year and begin to draw their pensions and purchase annuities.
At that point, once the new financial landscape is established, will it dawn on many that the difference that retirement has made to their disposable incomes and the sacrifices and cut backs that will need to be made. The transition from a paid salary to a reduced fixed pension can be difficult and for some, one many never really come to terms with. There have been many cases recently whereby following the first few years of retirement we are arranging equity release for the consolidation of debts such as credit cards and loans. This was a result of continued spending following retirement without carrying out what should be a mandatory income and expenditure analysis. This brings us to our second very common factor.
- Indebtedness – Many of these baby boomers reaching retirement have grown use to managing debt during their working lives. This generation has lived through vast fluctuations in the economy such as interest rates, inflation and the recent credit crunch. Having come through the worst of this and still showing such positive signs of equity, gives them the confidence of maintaining such debts into retirement. After all, this age group are probably the ones with the best repayment history, credit record, guaranteed incomes and all coming with security of tenure in their properties!
A recent study showed that one in six over 65’s expects to borrow money in retirement to meet their retirement goals. In fact, in the last year alone, 16% of over 65’s applied for a loan or credit card. The issue nowadays is of course that credit is not as readily available and one in ten applications from over 55’s will be declined, as lenders become far less willing to lend into retirement.
This applies to mortgages also. Lenders are increasingly calling in mortgage balances from customers aged over 55. It’s estimated 1.3 million households over 55 are still paying their mortgage, of which 289,000 over 65 year olds are still saddled with a mortgage debt! These are the people who will be looking towardsequity release solutions in 2017 & beyond.
- Interest only Mortgage Prisoners – Worse still are the Financial Conduct Authority (FCA) figures confirming the size of the ‘interest only time bomb’ looming. Of the volume of interest only mortgages due for repayment by 2020, 1 in 10 of these mortgages have NO repayment plan and up to 1.3 million interest only borrowers face shortfalls averaging £72,000.
- House Purchase/Moving Home – we are seeing the data already in 2016 from mortgage lenders regarding the upturn in mortgage lending which has been due to the housing market improving significantly. With support from the government with its ‘Help to Buy’ scheme, this has stimulated the housing market from the bottom end and resulted in a knock on effect up the ladder.
We are seeing an increasing number of clients using interest only lifetime mortgage products to assist with their house purchase. We can advise on products from a range of providers whereby the interest element and possibly more can be repaid back to the lender with no financial penalty, and are becoming a high percentage of our overall equity release plan recommendations.
Additionally, we are experiencing retirees at a critical point in their lives looking to downsize, or move nearer to their families. This could be for disability or financial reasons and moving into a retirement property where less maintenance is required. Purchasing such property may still require finance to bridge any shortfalls, or create surplus funds for other financial/personal reasons.
- Burgeoning Confidence & Optimism – There has been a silver lining to the issues of retirement finance…PROPERTY. Staggeringly, 69% of the over 65-year-old population own their home outright and unencumbered. The most recent research has calculated the over 65’s owns a combined £752 billion in housing wealth!
With this kind of security behind them and the changing attitude towards inheritance it is beginning to shape the equity release landscape we are seeing & being developed as we speak. Traditionally, roll-up equity release schemes were the norm. Compounding of interest put many people off releasing equity. As a consequence, interest only lifetime mortgages have come to the fore. In being able to control the balance by making regular or ad-hoc repayments, one can now maintain a level balance, or even reduce it year-on-year. We have evidenced the growth in inheritance protection via lifetime mortgages and will become another of the factors affecting the growth in equity release for 2016.
Flexibility is key for many now entering the market. One major step forward for equity release mortgages came with the advent of drawdown lifetime mortgages. Here borrowers can withdraw tax free cash in stages from a pre-agreed facility. Drawdown equity release now accounts for over 64% of all plans written during 2016.
Hence, another good factor to influence the popularity moving into 2017.
Finally, we have new providers entering the market such as Legal & General and more expected to follow which will further increase the choice of plans available.
All this development and recent equity release press coverage stokes up the interest in a market that has previously been in the doldrums, but has listened to the consumer & now developing products to match retirement planning needs.
Summary – Equity Release 2016
Equity Release will take off in 2017 because providers have listened to their customers and they can be very demanding and rightly so. Customers want flexibility, they’ve got it, Customers want no early repayment charges, they’ve now got it, Customers want to repay capital without penalty, they’ve got it, Customers want to pay off the interest, they’ve got it, and customers want to partially repay the interest without being tied or committed, guess what? …they’ve got it!
Of course, that doesn’t mean that it will automatically be right for you, as there can be more suitable alternatives. The key is to discuss your options with an equity release specialist adviser who will explain all your options and allow you to make an informed choice. I recommend you involve your family in the decision and attend meetings with one or more of the family members present. If you and any of your family members want to find out more about using your home as capital, please contact me on 01204 884545. Alternatively, click here to fill in our contact form and we will be in touch.
Equity released from your home will be secured against it.