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For a number of years equity release has been touted as the next big thing but a reluctance to spend the children’s inheritance, or a belief that something more sinister lies just below the veneer of a respectable equity release product, has turned many people away from the sector.
Back in February the Equity Release Council predicted a year of growth for the market fuelled by product innovation and increasing consumer awareness. And with three quarters of the year already passed the Equity Release Council’s predictions are looking to be right on the money.
The increasing appeal of equity
release is closely linked to the financial challenges facing the UK population and the shifting landscape of retirement planning. With the cost of living rising and more people carrying debt into their later
by
Nigel Waterson, chairman of the Equity Release Council
The FCA has suggested some 600,000 customers will see their interest-only mortgage mature during the period leading up to 2020. Interest-only allows a property or other investments to grow in value and deliver the capital needed to eventually clear the outstanding debt. But time can also be a curse for
interest-only customers. Aside from the estimated one in ten who currently have no repayment plan in place, others may have found fluctuating house prices or falling rates on savings and investments have left them without the anticipated nest egg they were counting on to pay off their debt. In these circumstances interest- only customers face a real risk of having insufficient funds to make their repayments once their loan reaches maturity.
Findings from the May edition
of Aviva’s Real Retirement Report illustrate the extent to which the rising
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years a growing number of consumers are looking at equity release to fulfil their needs.
Chris Prior, manager of sales and distribution at Bridgewater Equity Release, says that with state pension provision not what it once was and the increasing cost of long-term care for the elderly we have already witnessed an uptick in individuals using equity release to address these issues. “There is nothing to suggest this trend will reverse,” he adds.
Consumer confidence is also beginning
to return to the market and the high level of product regulation in place to safeguard equity release customers is becoming one of the industry’s unique selling points. Susanne Garrod, mortgage consultant at Blackburn-based Questa Chartered, says customers will never owe more
cost of living is currently having an impact on people’s ability to save – more than a third (35%) of UK adults feel they are not setting any money aside on a monthly basis to support themselves in retirement, let alone cope with the weight of outstanding mortgage debts. Unfortunately it does not look as though the tables are going to turn anytime soon. Our own research shows that although 33% of people do not feel their ability to save will change over the next five years a worrying 22% believe it will deteriorate.
Faced with a lack of savings or other investments to clear an interest- only loan, two practical alternatives include selling your property or taking out an equity release product. Downsizing can be a highly emotive and undesirable option as families form strong ties to their home and in many cases it may not be a practical option. Key Retirement Solutions’ Market Monitor for the first half of 2013 shows that more than a fifth (21%) of consumers are currently using equity release to pay off outstanding mortgages. This has risen considerably over the past two years, as statistics from the first quarter of
BANKS The renewed interest of banks in the sector is a good barometer of the level of growing confidence in the equity release. In the past some banks have been burned by the equity release market and in the past it has generated a lot of negative press for the mainstream
2011 showed this applied to just 16% of consumers. Equity release is a viable option worth considering for those who find themselves with limited escape routes from the interest-only trap. It offers the ability to pay off your mortgage with a highly regulated and protected loan, while retaining the right of tenure to your property for the rest of your life. Although interest-only mortgages have caused a number of people to fall into negative equity when house prices dropped in value, The Council’s ‘no negative equity’ guarantee ensures you will never owe more than the value of your home. Providing safeguards such as these means that rates for equity release products are typically higher than homeowner mortgages; but cheaper products can end up placing greater risks on consumers’ shoulders and this added protection can prove invaluable in the long term, particularly if market conditions change.
Advisers should nonetheless expect to see the number of interest-only enquiries increase in the years to come, and consider equity release as a valuable part of their toolkit to defuse the so-called interest-only time bomb.
MORTGAGE INTRODUCER SEPTEMBER 2013 35
than the property value when sold as the sector is now regulated by the Financial Conduct Authority and there is a no negative equity guarantee promise. “All equity release advisers have to be suitably qualified and have FCA permission in order to advise,” she says.
The days of equity release being seen as a more nefarious side of the market seem to have been replaced as a greater consumer understanding of such products.
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