The value of loans made in the equity-release market topped £1.4bn last year
, a 29% increase on the year before and the highest figure ever recorded, as the market exceeded pre-recession levels for the first time.
More than 21,000 new customers – all homeowners aged over 55 – applied for equity-release loans
that exploit their housing wealth to boost their finances and help with living costs in later life, according to the Equity Release Council (ERC).
The retirement-age population currently has an estimated £1tn tied up in bricks and mortar as the buoyant performance of the housing market in recent years has seen prices soar. This fact, coupled with the news that the number of mainstream mortgages approved is running at 40 times the number of equity-release deals agreed, indicates that there is considerable scope for expanding the sector.
"The use of equity release to clear other debts has become much more common"
This trend will be driven with the help of insurance companies such as Legal & General (L&G), which is looking for new market niches following sharp falls in the number of individual annuities sold since changes to the pensions market were introduced in last year's Budget
. So what are the options available for silver surfers looking to become a little more liquid?
1. Print money
The market L&G is eyeing falls into two main parts in the UK: lump-sum and drawdown lifetime mortgages.
In both cases, applicants have to be at least 55, and most are a good deal older than that. Both types of product enable a borrower to release a proportion of the equity in their home – on average about 23% – and to pay no interest on the debt during their lifetime. Instead, interest is ‘rolled up’ and added to the capital with the total repayable when (in the case of a couple) the second borrower either dies or enters residential care, at which point the property will be sold and the outstanding debt cleared.
The average age at which lump-sum borrowers take out equity release
As the names suggest, lump-sum products release a single slice of capital, while drawdown products enable borrowers to take an initial amount and then further sums up to an agreed maximum, with interest payable only on the amount drawn down.
2. Clear debt
The use of equity release to clear other debts has become much more common. Often, the culprit will be an interest-only mortgage that is about to reach full term and for which there is no repayment vehicle in place – although credit-card debt is sometimes a factor.
ERC figures seem to bear this out. The average age at which lump-sum borrowers take out equity release is 68.8 years, suggesting that they need to access their capital fairly soon after retirement. The average age of drawdown customers, who are likely to use the funds more gradually to supplement their income, is now 71.6 years. The ERC figures show that the average age of all equity-release borrowers continues to edge upwards, possibly because more people are working past retirement age.
3. Capitalise the bank of mum and dad
A small but growing number of borrowers are using equity release to fund gifts to children and grandchildren, either for property purchases or to clear student debts. In effect, these borrowers are using equity release to provide family inheritances years earlier than they might otherwise arrive.
4. Short circuit regulation
Whether to clear existing debts, supplement income or provide a lump-sum gift to family members, it looks as though the decision to choose equity-release products is being strongly influenced by another factor: regulation. As part of the reforms in the Mortgage Market Review (MMR)
, conventional mortgage lenders have tightened their affordability criteria and, as a result, it has become much harder for older people to obtain conventional mortgages if the maturity date is beyond the state pension age.
This may be restricting scope for product innovation as well. Some recently launched products allow borrowers to service the interest on their loan for a period (thereby reducing the sum that must ultimately be repaid from their estate) before switching into interest ‘roll-up’ later on. Some of these too are falling foul of the stricter lending criteria.
“It seems, from tracking advisers’ experiences on LinkedIn, that they’re trying to arrange these types of plans for their customers and it’s being refused on affordability grounds,” says Louise Overton, a research fellow at Essex University who focuses on equity release. She says: “It looks like that is an unintended consequence of the MMR.”
The original version of this article was published in the December 2014 print edition of the Review.