Low interest rate environment

There are two ways that the current low interest rate environment has driven the equity release market:

• Releasing equity in their homes can help customers to fill the gap in their retirement income. Lower interest rates have led to poorer annuity rates. We estimate that between December 2013 and August 2016 - typical annuity rates have worsened by some 23%. This is bad news for those looking to convert defined contribution pension pots into a regular, guaranteed pension income. 
• Interest rates are some 0.5 to 1 percentage point lower than three years ago, hugely improving their perceived value by customers. Low interest rates make equity release lending cheaper simply by reducing the interest that customers eventually have to pay back.  According to the ERC’s Autumn 2016 Market Report, the market average rate of interest for the product is currently just below 6% but many providers are offering rates below 5% and some even below 4%. 

The oncoming storm: interest-only mortgages

Calling it a “ticking time bomb”, the Citizens’ Advice Bureau warned last year that nearly one million UK interest-only mortgage customers could reach the end of their term with no savings vehicle to pay off the loan.  Releasing equity may be a viable and attractive way for many to deal with mortgages secured on homes with a significant current equity content. Indeed, Legal & General has already launched an arrangement to provide an equity release solution for Santander’s interest-only customers.

Product innovation

The equity release market hasn’t stood still either, in terms of how the product is used and in terms of products available.  For example, two-thirds of new sales are “drawdown slices” taken when needed. This compares with around 80% of equity being taken as a one-off lump sum 10 years ago.

There has also been significant product innovation to respond to customer needs, like flexibility over paying back the loan being introduced. Some products now allow customers to pay off interest throughout the duration of the loan rather than it accumulating and continually increasing the balance to be repaid at maturity.  Another option now available is downsizing protection – this  allows the loan to be repaid in full if this is done in conjunction with moving to another property.

Products that comply with the ERC’s Product Standards also come with a “no negative equity guarantee”.  This means that when the property comes to be sold, the customer (or their estate) will never owe more than the property’s value.  This goes a long way in boosting consumer confidence and avoiding the concerns that customers could potentially owe more than their property is worth.

Changing attitudes

Previously it was common to work towards a debt-free retirement;  the main reason for releasing equity was for home improvements.  Attitudes are changing, though.  Results from a recent YouGov survey commissioned by Hymans Robertson show that over one-third of people who had recently retired or were nearing retirement either had debt or expected to have debt when they retired.  This was most commonly in the form of mortgages, which many used equity release to pay off.  

This echoes changes in the regular mortgage market. It was standard practice for banks and building societies to end mortgages at age 65. In 2016, however, most big lenders increased their maximum ages – Nationwide’s maximum age is now 85 and many others have increased theirs to 75 or 80.

Threats and Opportunities

A number of insurance companies have used equity release mortgages to back non-profit annuities. The attractions were clear: risk-adjusted yields were high compared to other investments, they diversified the asset portfolio, and they had the potential to provide a broad longevity hedge. While deemed not to meet the onerous and prescriptive Solvency II matching adjustment eligibility criteria in themselves, a securitisation solution can overcome this and companies can continue to benefit from the matching adjustment. 

There is a potential issue with capacity on the distribution side  -  only 750 from some 6000 active advisers are recognised as equity release specialists.  However, the Financial Conduct Authority said in November 2016 that it supported more training in this area. The London Institute of Banking & Finance recently reported that registrations for its Certificate in Equity Release qualification have increased by more than a quarter over the last year.  So, perhaps the regulator and trade bodies working alongside product and advice providers can build the knowledge and willingness of advisers to provide support in a growing area increasingly seen as very much part of the retirement market.

Finally, it’s worth noting that net property wealth in the UK currently stands at some £3.5 trillion, £1.5 trillion of which sits with the over 55s.  Although volumes of equity release have increased, surveys show that less than 2% of homeowners have used equity release to tap into their property wealth. With a market that could be ten times larger than even this year’s record size, the prospects for equity release are indeed bright.

Hymans Robertson has a wealth of relevant experience across the life insurance industry. Our experts would be delighted to support you. If you would like more information or advice, please contact us:

Karen Brolly

Theresa Chew