With more Britons unlocking value from their homes through equity release, James Titmuss looks at what are the key factors driving this changing demand.
Older Britons took out more equity release plans than ever before last year, unlocking £3.06bn worth of value from their homes according to the Equity Release Council. That was more than 40% up on the previous year’s total and well over twice as much as in 2014, when the market was worth £1.38bn.
The data represents a sea-change for the equity release industry which was once regarded by financial advisers as a last resort for older Britons looking to free up cash, particularly in retirement. From our perspective these are the key factors driving this change, and in turn investor interest in the businesses that can deliver these services:
1. Greater mainstream acceptance of the product
Equity release plans have in the past faced cultural difficulties. The idea that property wealth should be accumulated and then passed on to children is deeply engrained for many people. Mis-selling scandals in the 1980s and the 1990s coloured perceptions of equity release plans, with the products seen as poor value.
More recently however, attitudes have changed. The very significant increase in housing wealth over successive generations, at a time when pension provision has become less generous, has left many families asset rich but cash poor with more equity saved in their house than sits in their pension plans. Nowadays many can release some value from their property while maintaining a generous nest egg for their children. Equally, product design has improved, and consumer protection has been strengthened, particularly with the No Negative Equity Guarantee that protects future generations, creating a product fundamentally more attractive to its target market.
2. More funders in the market driving interest rates down
The bulk annuity market is booming, with record numbers of companies transferring their pension promises to specialist insurers this year – some £18bn of liabilities are likely to be transferred before the end of the year.
Insurers in this market are major investors in equity release plans, which offer attractive returns and a natural hedge for the longevity risk on bulk annuities: if life expectancies increase, adding to the cost of annuity payments, so do the interest charges on equity release plans, since these will be repaid later. A surge in the bulk annuities market has therefore brought more funders into equity release products and led to lower pricing on products.
It will be interesting to see if recent regulatory news flow on the valuation of those No Negative Equity Guarantees dampens the appetite of funders to lend or impacts products pricing.
3. Inadequacy of pension savings:
The decline of final salary pension schemes and the squeeze on real incomes over much of the past decade has led to more people retiring with inadequate savings for later life, whether in dedicated pension products or other savings vehicles. In August, the Treasury Select Committee warned that 12 million savers are heading towards retirement without having made sufficient provision.
With 53% of 55-to-64 year-olds owning their home outright, rising to 71% of the over-65s, equity release plans represent an opportunity to fill this shortfall for people lacking conventional pensions savings. Many of these homeowners have allocated more to paying down their mortgages and creating housing equity than they have to saving in their pensions.
4. Deferring annuity purchases
The pension freedom reforms of April 2015 which enabled individuals over 55 to take 100% cash out of their pensions, has reinforced the perceptions of many savers that annuity contracts offer poor value.
Against this backdrop, increasing numbers of savers are keen to at least defer the purchase of annuity as they move into retirement. Equity release plans are a potentially useful source of capital enabling them to do so.
5. Interest-only mortgages reaching term
The boom in interest-only mortgages in recent years has not been accompanied by a similar increase in the number of people setting up savings schemes in order to repay the capital owed on their home loan. Many borrowers took out interest-only loans because this provided an affordable route into the property market; repayment mortgages or capital repayment savings schemes were out of their reach.
As a result, the number of people reaching the end of their mortgage term with no means to repay the capital they owe has increased sharply. The Council of Mortgage Lenders Lenders estimates as many as 1.9 million Britons are paying off the interest on their home loans but making no dent on the underlying capital.
Equity release plans offer a way for many such borrowers to stay in their homes at the end of their original mortgage term. They provide the capital needed to repay the first mortgage, with future repayment terms that reflect the borrower’s circumstances today.
6. Retirement interest-only mortgages
The move by the FCA earlier this year to start treating retirement interest-only mortgages more akin to standard mortgages rather than lifetime mortgages has led to more lenders looking to enter or re-enter the market for these products which have similar features to lifetime mortgages but with the interest paid off rather than rolled up. These products will appeal to customers whom have an income source they can use to pay off interest but still have a borrowing requirement later in life. This should widen the addressable market, lead to further competition and potentially see lifetime mortgage providers increasing flexibility in their products.
These changes have created an attractive market opportunity for equity release businesses which can offer homeowners ways to free up savings held in their property. From an investor’s point of view, these trends create potential for further future growth if businesses in this space can build a compelling customer proposition and an accessible product.
If you’re an equity release business looking for investment, please get in touch.