Making it work: What needs to change for equity release to flourish?

Affordability requirements are one of many areas that need to change before the equity release market can truly work for clients, industry experts tell Jenna Towler

Equity release had a record-breaking year in 2015 with a total lending value of £1.6bn but providers believe the market has a long way to go.

They believe more and more people will turn to housing wealth as they come to realise their retirement income needs won’t be met by pensions alone.

Last year was good but they want 2016 to be better.

Alice Watson_Retirement AdvantageRetirement Advantage equity release product and communication manager Alice Watson said: “Although £1.6bn was a great figure we were hoping for slightly more. We really want 2016 to be the year that it comes into the mainstream.”

However, issues such as consumer education, affordability requirements, the definition of vulnerable clients and negative headlines are all having an effect on market growth.

Last year, the Financial Conduct Authority (FCA) said it would review the regulatory framework applied to equity release amid concerns a “dirty word” reputation had led to an under-functioning market.

In response, in February this year, the Equity Release Council (ERC) called on the FCA to relax affordability rules to help more customers make interest repayments before switching to a roll-up agreement (see box below).

ERC chairman Nigel Waterson said: “There needs to be careful consideration of the factors which differentiate ‘residential’ and ‘lifetime’ borrowing. Revisiting affordability rules may help more consumers to make use of options already offered by equity release providers in later life, as well as encouraging more new entrants to the market.”

Bower Retirement Services chief corporate officer Andrea Rozario believes the equity release market is ready for revolution.Andrea Rozario

“I think the market is in for big change over the next five years”, she said. “What these changes will look like will depend on how providers and the regulator act now.”

She agreed current affordability rules need to adapt to cater for those in retirement.

“The industry and regulators view of the customer needs to be brought into the here and now and how we market to the older customer needs to evolve.”

Key Retirement technical director Dean Mirfin said: “The distinction which is evident in the two loans in the market which are captured by the affordability rules is that interest payments are non-contractual, i.e. voluntary.

“When this is the case affordability should not be a requirement.”

He added: “Many of the risks associated with affordability are precisely why borrowers are attracted to this type of plan, the security of knowing that in any event they can stop payments and for the loan to convert to roll-up.”

Retirement Advantage’s Watson said the affordability requirements “had not helped” but the FCA had made positive changes, such as the regulatory sandbox to encourage lenders to trial new products.

“It is a step in the right direction, it is a safe environment where lenders can try out new products without having to go through the full process which is good,” she said. “They are definitely making the right noises.”

Rozario said the current definition of ‘vulnerable client’ also deserves attention.

“We have to accept that the typical view of an ‘older person’ is outdated,” she said. “The impact of living longer will affect every aspect of life and businesses and the FCA has to recognise this.

“While some equity release customers will be vulnerable the vast majority won’t, and we need to tailor the market to meet their needs while still ensuring we adhere to suitable processes to protect those that need it.”

Dean MirfinMirfin added: “Clients of any age may be vulnerable. Circumstance rather than age can create vulnerability. An example can be drawn from mainstream lending, is it not fair to say that a consumer desperate to purchase a home is vulnerable as a result of needing a lender to lend to them?

“Vulnerability should be viewed in the context of a client’s circumstances and what may change in their circumstances over time.”

Watson believes vulnerability safeguards are “about right” but questioned whether all of the ERC’s safeguards are completely necessary.

She explained: “They have a no negative equity guarantee which means that you cannot owe more than the value of your home but if you are only borrowing £10,000 on a £500,000 property that is quite an expensive product for you to have.

“Whether those are necessary for every single product is more of a point of conversation – and those conversations are happening at the moment.”

Mirfin also there were also increasing demands from consumers for higher loan-to-value (LTV) lending.

“The challenge is not necessarily that lenders do not want to increase LTVs, the challenge is that to do so may render loans unable to offer the ‘no negative equity’ guarantee due to the house price inflation risk associated.

“That said if we are to meet this type of demand it will be for consumers to decide whether they are happy to proceed without such guarantees. My view is that they should be allowed to decide whether to facilitate being able to borrow is of greater value than such guarantees.”

Despite the barriers, Watson remains convinced equity release can, and will, become mainstream.

“Products have come on so much in the past few years, flexible payments, fixed early repayment charges. There are a lot more options for people that are a lot more attractive.

“Also, people going into retirement now might not have necessary savings – they will need to get more income and equity release is a very viable solution for that.”



Changes to the Mortgage Conduct of Business rules put in place after the Mortgage Market Review, mean lifetime mortgages that allow clients to pay interest are subject to providers’ affordability assessments.

This is in spite of the fact that interest payments are always options and clients are never at risk of losing their homes should they be unable to continue.

Source: ERC


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Adviser view

Rowley Turton director Scott Gallacher

“I am sceptical that it ever will become mainstream.

“All of the arguments in favour of it make lots of sense in terms of demographics, property wealth, struggling pensions. That said, there is a lot of reluctance for people to go down that route primarily because they are concerned about inheritance.

“There is also still concern about regulation of the market. While essentially it is safe there is still a lot of negativity surrounding it.

“We do have the equity release qualification but in the past ten years, we have done one case.

“If it was going to be a mainstream product then it already would be.

“But there is an argument that things may get worse. As we move through the baby boomers maybe there will be a bit of a boost [for equity release] where it becomes more popular for people who don’t have that pension wealth but do have housing wealth.

“But further down the line, you have people with auto-enrolment who have built up some level of pension saving.

“Pension freedom could give it a boost. If people do blow their pension funds – not on a Lamborghini but on a caravan perhaps – maybe they will be forced to do equity release at some point. It might be a ‘needs must’ for those people.”