The client profile for lifetime mortgages has evolved considerably over the past few years, as the products are no longer necessarily’ lifetime’, says Will Hale, CEO at Key Later Life Finance.
Last year saw a 31% increase in new equity release lending to a record high of £5.58 billion with 29% more plans taken out with the result that 2022 ended with 52,295 completions.
On the face of it, these are figures which more than justify the title of a recent report commissioned by the Equity Release Council – Later Life Lending: Great Expectations.
A Mintel report last year also highlighted “the fact that equity release is starting to be seen as a mainstream financial planning tool” and said the mis-selling legacy from the 1980s is fading.
While announcing equity release’s arrival as part of the mainstream mortgage sector may be premature, it is undeniable that lifetime mortgages have evolved to the point where modern products are now suitable for a wide range of different customer profiles.
From IHT planning to boosting income and supporting wider family finances, the increasingly flexible nature of equity release plans mean that intermediaries can be confident that they can help clients find a plan which meets both their long and short-term needs.
The product evolution
While some lenders streamlined their ranges following the challenging mini-budget in September, advisers can still choose from around 317 different plans as well as a host of flexibilities. Finding the right mix of product features to fit customers’ individual circumstances is arguably easier than ever as we’ve seen a range of changes including:
- Different approaches to early repayment charge’s (ERCs). Not only are fixed ERCs (63%) now far more prevalent that variable (3%) ERCs but 34% of plans now offer customers a choice of fixed or gilt-linked variable charges. We’ve also seen the period over which these apply fall with some products seeing these drop away after only six years.
- Downsizing protection is now offered on 61% of plans compared with just 51% a year ago. While many take out equity release on their property as they have no intention of moving, this feature allows a customer to move home – either ‘porting’ the plan with them or if the new property is not suitable, repaying the loan without any charges.
- Around 29% of plans offer inheritance protection compared with 25% a year ago. While many customers use the proceeds of equity release to support their wider families, others want to guarantee that they can leave a proportion of their home to their families – irrespective of future house price movements.
- A ‘compassionate window’ is now standard on many joint-life plans that means that following the first death, the surviving partner can repay the loan without any ERCs applying within three years.
Not only have features increased but active management of equity release borrowing is now a real focus. Such is the importance that the sector places on the flexibility to make repayments, the Equity Release Council has enshrined the option for all new customers to make ad hoc capital repayments within lenders’ criteria as their fifth standard.
Almost two thirds (60%) of plans also allow ongoing customers to service all or some of the interest which is particularly important in the current environment when rates are c. 6%. Active management of equity release borrowing also means that should rates change in future, the client has an LTV which allows either remortgaging or further borrowing.
Modern equity release in action
While equity release plans are long-term products, these flexibilities mean they are no longer necessarily ‘lifetime products’ and they can also be used to support a variety of needs including helping bridge the gap between finishing work and starting to receive a pension.
Take the example of 59-year-old Mrs Jones who has decided to leave her job as a bank manager to become a full-time carer for her 90-year old father and to work part-time.
She is divorced with a house worth £500,000 which she owes around £65,000 on through a repayment mortgage on her lender’s standard variable rate. She estimates that she needs £20,000 a year to manage repayments, debts and living expenses but will only earn around £14,500.
She has a defined benefit pension that will pay £2,000 per month at 65 and can claim her full State Pension entitlements at 67 in 2031. Her defined contribution (DC) pension will provide a lump sum of £50,000 if she keeps paying into it and starts drawing it when she takes her State Pension. In addition, she is an only child and likely to inherit her father’s £650,000 estate which means that she may be able to leave her DC pension to her own children.
But she needs to manage the gap between now and accessing her pensions. After speaking to a specialist adviser that her IFA introducer her to, she decided to take out an equity release plan for £70,000 at a rate of 6.08% MER and then made repayments of £365 per month to manage the interest.
Mrs Jones is financially stable but facing the classic conundrum of being ‘asset-rich’ both now and in terms of likely future inheritances but ‘cash-poor’ in the immediate future.
Summary
The equity release evolution has been transformational for the market and there is still further to go as lenders enhance products to increase flexibility.
Advisers are using equity release and other later life lending products for a wide range of issues including as bridging income gaps alongside final salary pensions and the State Pension while helping with life issues such as divorce and bereavement.
Increased flexibility means that not only are equity release plans no longer necessarily lifetime products, but they are a mainstream financial planning tool – so providing further support to the view that all property assets should be considered as part of holistic retirement advice.
