UK equity release: returning to respectability
In Part 1 of our focus on equity release, we identified the core drivers of a growing equity release market – particularly the gap between the income needs of retirees and the yield potential of their non-housing assets.
The potential for an income gap is clear from the gulf between pension and net property assets in the 55-64 age group. Property owning households (79% of this segment) which have not been the beneficiary of generous public sector pensions and are instead reliant on private sector pensions are often in a particularly parlous state.
Figure 1: Median household pension & net property worth age 55-64
But potential drivers of demand, like love, can remain unrequited in the face of obstacles. NMG has identified a series of barriers and risks that are impacting the growth of the equity release market.
Looking at the adviser – client interaction:
- Lack of suitable customers – equity release suffers from residual negative perceptions as a product for the lower end of the market (particularly associations with debt refinancing or aspirational spending), or as a last resort, as opposed to a valid part of a holistic retirement income strategy.
- Regulation flow-on impact – RDR has had the effect of driving the adviser channel upmarket to focus on wealthier client segments; in the process the client mix has shifted towards segments with less need for equity release.
- Exposure to mis-selling claims – despite being rehabilitated and now highly regulated, equity release remains an emotive decision vulnerable to sensational media ?coverage. The low loan-to-equity ratios and attractive commission rates on offer could also raise concerns over the value to customers.
- Family resistance – while aging parents may face a choice between tapping the equity in their home or a less than comfortable retirement, the children may have already “banked” their inheritance.
Figure 2: Barriers to advisers writing Equity Release
Equally there are a series of challenges with product and distribution:
- Limited product supply – we’ve seen new providers entering, but compared to the wider mortgage market, provider numbers are still tiny. There is a trade-off between relatively attractive margins available vs the significant upfront capital requirement (and associated liquidity risk) plus potential reputational risk.
- Narrow distribution channel – despite positive future intentions, there’s still a lack of advisers with the necessary qualifications to advise on equity release products. The market is dominated by two advice firms who can negotiate significantly better terms with product manufacturers, deterring some from entering the market (although accessing via a mortgage club has helped some advisers obtain rates closer to those offered to the big two).
- Product sustainability – for advisers to come on board in strength, a product category needs to be seen to have enduring benefits through a range of economic conditions. Questions linger as to whether rising interest rates and / or softening property markets could result in equity release losing its attractiveness for both consumers and providers.
Advisers see the viability of equity release in terms of large numbers of clients who are asset rich and cash poor. The compliance burden and perceived risks of the product category still cause many to hesitate.
Equity release won’t be the go-to solution for advised clients that it could be for some time, if ever. But an increase in distribution, competition and a changing retirement landscape all point towards equity release becoming a better integrated part of the financial planning process. We expect new equity release sales to surpass the £4bn mark by the end of 2018, but with a concerted re-positioning effort the potential is larger.
Managed well, that is a good thing. After all, many retirement clients have an equity release plan of sorts – downsizing for example. These ad hoc plans are not necessarily the most efficient way of releasing value from the home. Having additional options in the adviser toolkit is beneficial.
For more information, contact:
Ralph O’Brien, Senior Consultant (London; firstname.lastname@example.org)
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