More people are taking out equity release but the size of the average lifetime mortgage loan has dropped in the past year to 41,000, suggesting that people are taking out less cash.
Companies believes that these figures from the Council of Mortgage Lenders are evidence of a healthy market where people are perhaps borrowing more sensibly in a wider range of geographical areas.
The number of new lifetime mortgages rose slightly from 23,215 in 2005 to 23,785 in 2006 but the value of lifetime mortgages dropped from 1,048m in 2005 to 971m, according to the latest CML statistics.
The value of new business in drawdown plans grew six and a half times and home-reversion plans leapt by 35 per cent, says Safe Home Income Plans.
CML head of policy Jackie Bennett says: “The trend towards smaller loan amounts on lifetime mortgages suggests that lenders and intermediaries are being careful to ensure that people are only borrowing what they need. The move towards greater use of flexible features that allow people to draw down money as they need it rather than all up front will have also helped the trend.”
Accord Mortgages managing director Linda Will agrees that people are taking more care.
She says: “People are taking a more pragmatic, sensible view about how much money they will take out now and how much they will take out in the future.”
She adds that equity release is a product that has traditionally been used by people in relatively well-off areas in London and the South-east but is becoming more popular across the country and she believes this could be contributing to the drop in loan values.
Will says: “As equity release becomes more popular nationally, the average loan will drop as geography will pull it down across the UK. Initially, the market would have been very affluent areas but there are pockets building up all over the country.”
Savills Private Finance associate Mick Ferrucci believes that many people are still after big amounts.
He says: “Lenders I have spoken to have been overwhelmed with enquires about bigger deals recently but they are turning them away because they want to keep a mixture of big and small loans.”
Hamptons International Mortgages technical director Jonathan Cornell says: “More equity-release loans going through is a good thing. Clearly, the idea that equity release is not an evil product is getting through. The increase shows that consumers have faith in the product. It should not be the first option but it is a good option for many people. People need money in retirement and everything in life seems to be getting more expensive. Why should someone worry about paying the gas bill when they have lots of equity in their home? Downsizing is a better choice but it is a pain and a lot of people want to stay in their homes.”
Ferrucci says: “Equity release is a lot more transparent now and there is a greater element of consumer confidence in the products.”
The value of the general mortgage market rose by around 20 per cent in 2006 while lifetime mortgages saw only a 3 per cent increase.
But Will says: “I do not think the market will have an explosion, it will more likely be a slow ramp-up. A few per cent each year. Three per cent is still a lot but the market has huge potential.”
Ferrucci says: “This shows steady growth in the market and it does not surprise me. It is not a rapidly growing market.”
But Cornell expected a greater rise in the value of the market and suggests that a report published by Which? in mid-2006 criticising the product may have stifled sales. He says: “I would have expected more growth. A reason could be the Which? report which was damning of the equity release market. A lot of older people trust Which? for advice and information and I do not think it did these people a favour.”
London & Country head of communications David Hollingworth says: “Everyone keeps waiting for a massive explosion and I am surprised that the market has not grown more but maybe it is just a slow burner. There is still an element of people being a little bit cautious but I think it will gather pace and the more lenders you get in, the quicker it will gather pace.”
Ferrucci is more cautious over the increase in equity release. He believes the decision to use equity release depends on an individual’s set of circumstances and says it is only a viable option if the person has no alternative.
He says: “I mainly get enquires from 50-somethings looking into early retirement and I generally try to discourage them. Some people are looking at equity release as a means of consolidation, a way out of debt, but this is not always the right idea. There are people out there who do not want to entertain the idea of selling when best advice would be screaming at them to sell and downsize.”
Purely Mortgages chief executive Mark Chilton says the small increase is not surprising.
He says: “The mortgage market is driven by house prices, by people’s affordability problems and their ability to borrow. In the primary market, house prices continued to go up significantly in 2006 and the average purchase size went up as well. But the equityrelease market is simply driven by the number of consumers wanting to do it. If you see 3 per cent growth in lifetime mortgages it is quite significant.”