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Unlocking potential

Despite historical growth in housing wealth, an aging population and potential pension shortfalls, the equity release sector has only experienced steady growth and many lenders continue to steer clear.

However, there have been some recent entrants to the market – Coventry Building Society and its intermediary division Godiva Mortgages, and LV=, following the acquisition of the new business operations of specialist flexible retire- ment business Tomorrow – formerly GE Life – from Swiss Re at the end of last year.

About the same time, Newcastle Building Society’s Equity Release Service was launched. This does not offer Newcastle-manufactured products but instead offers Newcastle customers a choice of products and lenders.

Key Retirement Solutions business development director Dean Mirfin says that he knows of at least two additional would-be equity release market new entrants that are currently hanging fire.

“There are a couple of new entrants who would have launched but are holding back. There are differing priorities because of the credit crunch. Conditions might be calling into question whether the lenders should be funding equity release when they are struggling to lend to prime purchase mortgage customers,” he says.

But this is just one recent factor that has kept would-be players on the sidelines.

The reluctance of some perspective equity release lenders has prevented the sales boom many in the industry have been expecting for up to a decade and makes today’s new entrants seem more as if they are going against the grain than stealing a march.

The CML recently published a report looking into this question of why equity release market has developed more slowly in the UK than in the US, Australia and New Zealand.

The report, entitled Please release me!, details how markets in Australia, New Zealand and the US have the same underlying fundamen-tals as the UK but have developed more strongly.

Research in 2007 by market analyst Ship and Mintel estimated that total equity release-related lending in 2006 to be £1.154 million, with Mintel forecasting annual sales of £1,744m by 2012.

Mintel’s model forecasts what is describes as steady growth, which does not support the boom years predicted time and again by hopeful market pundits.

Consumer attitudes could be keeping more major players from stepping up to the potential opportunities, dampening the squib on what many have hoped is a sales time bomb.

Newcastle Building Society retail sales executive Bob Mottershead says: “People in their seventies are used to the idea that you pay off your mortgage for 25 years, clear the debt and that is it. People coming into retirement in the future will have a different attitude and no choice but the see their house as an asset that they need to milk for all it’s worth.”

While Godiva Mortgage and Coventry Building Society equity release manager Mike Philps says: “There is no single magic bullet that will make equity release mainstream but as more people get used to the idea of being in debt in old age, we could see higher equity release sales.”

Philps and Mottershead both argue that the reticence of larger lenders is counter-productive, hampering the distribution of equity release and keeping it stuck in its current niche product.

“Coventry is probably the first high-street brand offering its own product and equity release probably won’t become a mainstream product until it is more widely available in this way,” says Philps.

While Mottershead says: “The reason why the big boys are not joining in yet is because the market looks too small for them, but it is a chicken and the egg situation – it will only take one of them to join for the others to follow and the market to really take-off.”

Despite the reluctance of some major players to launch their own brands on the equity release market, Mirfin suggests there could be some good news from the broker channel.

“While business has been slower than it might have been at the start of the year, the number of enquiries and referrals is up considerably. The demand is certainly out there and IFAs are realising that referring clients interested in equity release could provide them with a new income stream,” he says.

Looking at why those newer equity release entrants have decided to launch new mortgage propositions in such challenging market conditions, Philps is keen to emphasise the long-term game and the fundamental match between equity release and Coventry’s core customer profile.

“The reason we decided to launch is because there is a very good fit between some of our customers, who tend to be more mature, and equity release. We are looking at the long-term and short-term fluctuations in property values and the like do not impact on this outlook, both for us and our customers,” he says.

Certainly, the background statistics support the long-term strategy.

Analysis from the Office of National Statistics show the shape of the UK’s ageing population structure. The number of people aged 65 and over is projected to increase from 16 per cent in 2006 to 22 per cent by 2031, reflecting the large numbers of people born after the Second World War and during the 1960s baby boom.

Life expectancy at age 65 in the UK has reached its highest level ever, both for men and women, with men aged 65 expecting to live a further 16.6 years and women a further 19.4 years.

All of this supports the story that gives equity release an increasingly important role, not just in the years to come, but decades ahead.

But the need to boost retirement income in the face of longevity alone has failed to direct droves of older homeowners towards equity release so far and a further obstacle to sales has been product design, say the experts.

Things are moving on though. For example, Godiva’s mortgages do not carry early redemption charges, just the latest development in equity release product design.

Says Mottershead: “Product flexibility is key to the development of the market, for example, the adding of drawdown products was an important development. We currently have some good, open creative minds thinking about product design which can only bode well for the future.”

Arguably, what the smaller, regionalised players need to see next is bigger, global brands embrace product innovations, shifting consumer attitudes and needs and step up to the challenges and opportunities involved in growing the equity release market.

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