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Equity release – the answer to older borrowers’ mortgage woes?

Several high-street lenders are eyeing a move into equity release to aid older borrowers and interest-only prisoners but the regulator ‘remains stuck to its outdated attitude’

The UK mortgage market has experienced a remarkable turnaround over the past 18 months, with gross lending forecasts for 2014 being revised upwards to more than £200bn. 

The equity release sector has experienced its own boom too; total lending in the sector in 2013 reached £1.07bn – a 16 per cent increase on the previous 12 months. 

Equity Release Council chairman Nigel Waterson believes several high-street lenders could enter the market in the near future while brokers argue equity release could provide a solution for older borrowers and interest-only prisoners. 

But will the FCA’s stance on equity release advice prevent this?

Santander last month confirmed it is eyeing an equity release launch while Legal & General has long been rumoured to be planning a lifetime mortgage proposition. L&G Mortgage Club director Stephen Smith says: “This is a market we are interested in and we have work going on examining how we could participate in it as part of our overall engagement in the retirement market.”

Waterson says: “There seems to be a growing interest in terms of mainstream lenders discussing options with us. Mainstream lenders have tightened criteria for older borrowers and that makes equity release look more attractive – partly thanks to the Mortgage Market Review. I expect at least three major banks to enter the sector over the next 12-18 months – possibly more.”

Greater competition

Experts say greater competition in the sector will be good news for older borrowers. Since the introduction of the MMR, a number of lenders have cut the maximum age at which people can borrow and introduced tougher affordability checks.

London & Country associate director of communications David Hollingworth says: “Mainstream lenders are having to look at equity release because so many borrowers are facing problems – either because they are stuck on an interest-only product or they don’t want to sell their property to pay off the loan at the end of the term.

“We need to see more innovation and new options for these borrowers and it is positive that we’re seeing a return of big lenders to the equity release market. People should still consider the option of downsizing because equity release does just that – you are releasing equity that you could maybe have passed on to your family – but more options are what we need.”

Middleton Finance managing director Daniel Bailey agrees interest-only prisoners and older borrowers need more options but says the full terms and conditions of equity release, which vary from those of traditional mortgages, must be made clear.

“This has to be a positive step for certain kinds of borrowers because it is giving them that extra option,” he says. 

More awareness

“Equity release has always existed but, if the mainstream lenders are now looking to enter the market, that has to push it forward in terms of awareness.

“We see borrowers on interest-only deals and the bank says it wants the mortgage paid off. If the borrower cannot do that, they will at least have more options in the equity release space.”

According to comparison website Moneyfacts.co.uk, the average equity release plan charged a rate of 5.35 per cent in September compared with 7.86 per cent in 2007.

Bailey says increased competition could lead to further price cuts.

“It is important to remember that equity release is traditionally more expensive and a very specialised type of borrowing, so seeking the right advice is crucial,” he says. “We’ve seen competition in the mainstream mortgage market bring rates right down and this could be the case for equity release if we see even more lenders emerging.”

Neil Soundy Financial Services managing director Neil Soundy expects a boom in equity release and, while warning of current high fees across the sector, believes growing competition could help borrowers.

He says: “This is just the beginning and equity release is going to get bigger and bigger. At the moment we have some really high rates being charged and pretty large fees as well but what we’ll see is that more competition will bring those down.

“I would hope these three new entrants the ERC is forecasting will pave the way for more and more bigger lenders to launch their own equity release propositions because it is finally addressing an issue that is plaguing a lot of borrowers.

‘The way forward’

“It has to be the way forward. We all know about the problems facing interest-only borrowers and those who don’t want to downsize or leave their property but have a mortgage debt to pay off. They have very limited choice and, at the moment, expansion and more choice within the equity release sector seems to be the only option.”

Old-fashioned stance

However, any such growth may be tempered by the attitude of the FCA towards the market, which Waterson says is old-fashioned. 

The regulator has previously taken a negative view of advice in the sector. In May 2005, it outlined concerns about the suitability of advice given to consumers.

Waterson says: “We regularly engage in friendly debates with the regulator about our market and our view is that, in reality, the mainstream mortgage market is a higher risk because we have various safeguards in place to prevent people from losing their homes. 

“The FCA remains stuck to its somewhat outdated attitude but this will have to change sooner rather than later.”

The FCA was unavailable for comment.

ER

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  1. The situation with existing borrowers is very difficult, because many people have lost their jobs due to the recent reduction. Also there is an existing problem with foreigner workers who can work even more for less salary. And all these difficulties should attract government attention, because they can not be regulated by our market economy. But for the time being people get online loans in UK to improve their financial situation. This was provoked by the demand of banks to provide necessary credit history. However today many people still do not have appropriate credit score.

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