Although equity release remains a tiny part of the retirement income market, demand for these products is growing at a fast pace as homeowners seek to take advantage of increasing house prices and growing flexibility of the products.
Recent figures from equity release trade body Safe Home Income Plans show that the number of plans sold in the first half of this year stands at 14,224, an 11 per cent increase on the first six months of 2006.
Figures for lending are also up year on year, with 596.2m released from property in the six months to June 30 this year. This is up 10 per cent from the 541.8m released in the first six months of last year.
And it seems that the rate of growth for equity release is growing. Ship figures for the second quarter of 2007 show the number of plans sold is up by 16 per cent increase on 2006 and amount borrowed in this period of 302.3m – the highest ever quarterly figure for new business.
These new business figures are backed up by research from specialist equity release adviser Key Retirement Solutions. The company has recently relaunched its quarterly survey of the state of the equity release market and its figures show the market has been growing at about 18 per cent so far this year and Key is predicting faster growth in the second half of this year.
Key Retirement Solutions business development director Dean Mirfin says: “The second half of the year is traditionally much stronger for demand for equity release.”
According to King, the growth is due to three things: “The factors are demographic – more of the population are getting older, house prices and equity release product design development.”
An increased number of lenders now offer flexible drawdown equity release plans. Such plans allow borrowers to release value from their homes in small chunks rather than having to use the all or nothing approach that used to prevail. The one clear advantage this offers borrowers is interest is only payable on the money as it is released, so they do not have to pay interest on a large loan, only for much of the money to sit unused in the bank.
Mirfin says: “Drawdown allows clients to ease their way into releasing the money locked in their home, with the option to come back for more at a later date. The result can be considerable cost savings when compared to a traditional lifetime mortgage plan.”
According to Key’s figures, 44 per cent of all equity release plans are now drawdown plans. Last year only 16 per cent of equity release plans sold were drawdown.
Mirfin says: “We attribute this to the greater number of lenders who now offer this facility, the increased awareness among advisers that more lenders are offering drawdown and increased consumer awareness.”
He predicts that drawdown will account for more that 50 per cent of all plans sold by the end of the year and says it could be even higher.
He says: “Our view is that its rightful place is about 60 per cent of the market if advisers are doing their job properly.”
Mirfin stresses that advisers should be checking not only that equity release is a suitable product but also how and when clients intend to use the money released.
“When you are able to say to your clients, ‘Wouldn’t it be a great idea that instead of taking a lump sum and putting it in bank you can take what you need.’ If you present that option to a lot of clients there is no way they would have taken a lump sum.”
Providers are also waking up to the demand for flexible products. Stonehaven, New Life Mortgages and Norwich Union have all launched drawdown equity release products in the past year.
Prudential head of business development for equity release Paul Carter says: “As more and more providers come to market with a version of this product the more accessible it becomes.”
Some providers are also reducing the minimum amount released. Tomorrow recently announced a change to its flexible lifetime mortgage, reducing the minimum initial amount from 25,000 to 15,000 and the minimum amount for any subsequent release from 10,000 to 3,000.
Tomorrow equity release product and marketing manager Simon Little says this was a direct response to consumer demand to release smaller amounts more frequently.
Little says: “This in itself is reassuring, showing consumer attitudes are changing towards equity release – and becoming significantly more savvy.”
Another development that Mirfin and King are both bullish about is the increasing amount of business that is coming through financial advisers.
King says: “The amount of business going through intermediaries is going up. In the first quarter of 2007, 58 per cent of business came through advisers, in the second quarter this was 64 per cent.”
Mirfin says: “Intermediaries are finally claiming this market for themselves.”
In an area with such potential pitfalls this is a positive outcome.
Advisers will also benefit from an extended need for their service.
Carter says: “In the past it was a limited product so there was a limited need for advice. Now it is really a part of retirement planning. IFAs will find that where they previously had their clients up to retirement, now with these products they will have their clients for 10, 15 or 20 years into retirement.”