Green shoots are returning to the equity release market after the shock waves from the Government’s mini-Budget and turmoil in the mortgage market subsides, leading equity release adviser Key Later Life Finance believes.
Its 2023 Q1 Equity Release Market Monitor shows plan sales dropped from 12,551 to 6,975 while the value of new equity released fell from £1.399bn to £569.9m, compared with the same period last year. Once borrowing by existing customers is included, total lending in the first three months of 2022 was £722m.
While Key’s detailed analysis shows that demand remains high, the mini-Budget has impacted rates, product availability and loan-to-values which has seen fewer people access their equity in what has traditionally been the strongest quarter for the equity release market.
A cautious approach from customers supported by specialist advice has also damped volumes and put to rest any fears that equity release is being used as a short-term solution for the cost-of-living crisis. Customers on average still released £81,703 which was down on the £111,511 released on average at the start of last year.
How the money was used: Key’s data highlights that equity release remains a multi-use product with customers focused on meeting pressing needs while remaining cautious about discretionary spending given ongoing cost-of-living pressures and the higher cost of borrowing due to the increase in interest rates.
Repaying mortgages accounted for a third (34%) of the total value of equity released ages in the three months and 15% went on remortgaging existing plans.
The number of customers using some of the equity released to pay off unsecured debt dropped from 29% last year to 20% in the first three months of 2023 which may be explained by people focusing on more immediate needs such as repaying mortgages – especially as those coming off fixed rates deals may be facing a significant hike in monthly payments.
Interestingly, while almost half (45%) of customers used some of the proceeds of equity release to pay for home and garden improvements, it accounted for only 11% of the amount released and spending focused on essential maintenance such as central heating, windows and doors as well as rewiring rather than aspirational additions.
The proportion of customers using housing equity to support family and friends remained steady at 19% year-on-year but the proportion of equity used fell from 15% (Q1 2022) to 13% (Q1 2023).
The average age of customers increased by a year to 71 partly reflecting the more cautious approach taken by customers as younger applicants were more likely to wait until LTVs are more appealing. Just 27% of customers during the three months were under 65
There was a 5% increase in the number of single women – which includes divorced or widowed customers – to 31% of the customer base. More than half (54%) of customers were couples and 15% men.
Will Hale, CEO at Key, said: “There is no denying that the first quarter of 2023 was a tough one for the equity release industry. However, as rates start to fall, confidence returns and the product flexibilities are increasingly appreciated, green shoots are returning to the market with April and May seeing more positive volumes.
“Speaking to customers, we know that there is pent up demand as people look to boost retirement income, tackle rising costs and support their families. However, with the support of their adviser, they are being cautious around when to borrow, how much to borrow and considering if there are other options which better support their needs – both in the long and short term.
“Advice is highly personalised, and we do anticipate that customers will return to the market determined to make more use of the flexibilities such as the ability to service interest or make ad hoc penalty-free repayments. The recognition of the value that these features provide is vital and I would be entirely unsurprised if we saw innovation accelerate in this market, as we seek to bridge the gap in the later life lending market for those customers whose needs are not currently being met due to the LTV constraints with traditional lifetime mortgages, and affordability barriers with Retirement Interest Only Mortgages
“This – to my mind – is what will help to ensure that the remaining quarters of 2023 are more akin to those seen in previous years and we are able to help those customers who may need a later life lending option but have a more diverse set of requirements than we can currently cater for.”
Key’s Market Monitor, which analyses data reflecting the whole market, shows plan sales and the total value of new equity fell in every region. London and Scotland recorded the lowest drops in numbers of plans sold at 35.3% and 35.7% respectively.
Scotland and Northern Ireland saw the smallest drops in the total value of new equity released during the three months at 40.2% and 43.7% respectively.
The South East of England remained the biggest region for plan sales and the value of new equity released with London second for the value of equity released. The North West was the second strongest region for plan sales narrowly ahead of the South West.
Reaction
Paul Glynn, CEO of Air:
“While Q1 2023 was a tough period for the market, the storm clouds are starting to clear and customers are returning to the market, buoyed by the return of higher LTVs and more product choice. Supported by specialist advisers, customers are making sensible considered choices about if, how and when housing equity might play a role in their later life planning.
“Looking ahead to Q2, not only are we expecting volumes to increase but an ever-increasing focus on good customer outcomes to become evident as Consumer Duty becomes a reality. Whether it is setting up more formal referral relationships to ensure people can access all relevant later life products or considering whether their business model offers fair value to customers, firms in this market have been carefully considering the impact of this legislation.
“There is more work to be done and we look forward to supporting organisations as they adjust and thrive in the new normal.”
Ben Waugh, managing director at more2life:
“Whenever we look at the later life market, it is important to take a longer view. The 2023 Q1 Equity Release Market Monitor may indicate an overall drop in equity release transactions but, given the events of late last year, we should be talking about resilience more than contraction. Advisers are continuing to offer vital support to older homeowners managing their finances through the recent disruption, and for whom an equity release plan might be a useful tool.
“While over half of customers are couples, that 31% of clients are single women highlights the vital support that property can provide to often underserved demographics. Whether it is someone who has found that their retirement income does not meet their needs or that a life event in older age has impacted how much they receive, equity release can help to make things easier for a range of people in a variety of different situations.
“Each homeowner is as different but what they do have in common is the fact that their home is often their largest asset – and one that should be considered as part of sensible later lifeplanning. Top class financial advice will be key in steering these borrowers to the best possible outcomes.”
