Equity release is a way for borrowers to free up some of the wealth tied up in their home without having to sell it, making it a very useful option for homeowners who have benefitted from increasing property prices over the years.
Some of the most common reasons for customers looking at an equity release product to raise cash are to clear off debts, clear an existing mortgage, boost their retirement income, as part of inheritance tax planning or to help out family members.
But equity release is not without its drawbacks. The industry has a potted history, dating back to home reversion schemes in the 1980s which when combined with onerous terms, soured the reputation of equity release with consumers – and understandably so.
Reputational damage
The reputation of equity release was particularly damaged by the fact that some estate beneficiaries found themselves in a tight spot, where the debt built up from the equity release plan was higher than the value of their home.
This left the property in negative equity, so not only did they lose their inheritance but actually had to pay money out of their own pocket to clear the debt that was built up by their parents. To some extent, the industry has struggled to shed the impact of these stories even all these years later.
The launch of SHIP (Safe Home Income Plans) in 1991 was the industry’s response to cleaning up its reputation, and focusing on promoting safe plans with a no-negative equity guarantee. SHIP successfully lobbied for regulation in the equity release market which was successful and was introduced in 2008.
Yet despite SHIP’s great efforts to professionalise the sector, the complicated nature of equity release and its associated risks have left the industry exposed to customer complaints and FCA investigations into broker malpractice (just a few months ago the Financial Services Consumer Panel put forward a position paper calling for more investigation into the risks associated with equity release for vulnerable customers).
However, customers who seek advice from high quality, well respected equity release specialists are often pleasantly surprised at how the industry has changed and how, depending on their personal circumstances, equity release can be used as a helpful tool to help them with their financial goals.
Whether it’s making home improvements or necessary care adjustments, paying off an existing interest-only mortgage to enable them to stay in their home or using the money to improve their lifestyle.
Market growth
The equity release market has grown considerably in recent years: according to the Equity Release Council’s latest data, in 2021 more than 75,000 customers took out new equity release plans and a total of £4.8 billion was borrowed – a record figure.
More and more people are using equity release as a retirement planning tool, seeking new ways to raise money to fund longer lives and benefitting from growing house prices.
Thanks to increasing choice and competition in the industry, the sector is booming and is going through its own rebrand at the same time. In 2011, there was a total of £790 million worth of equity release mortgages taken out, 10 years later, that figure has risen to £4.8 billion.
The growth in choice for customers has also increased at lightning pace – in 2007 there were just 36 equity release products on the market. This grew to 86 in January 2018 and to 769 products today, according to FT adviser.
While the sector looks to embrace the opportunity presented by seismic socio-economic changes, the words ‘Equity Release’ still carry a tarnished reputation. I have lost count of the number of times customers have said that equity release isn’t for them due to a fear of losing their home or that the property value will not be able to repay the outstanding loan balance, passing on debt to their children.
Customers are always pleased to hear about today’s no negative equity guarantees and are often amazed to hear how flexible the modern products are and that they can even use equity release to purchase a new property.
As a result, I believe that equity release needs its own rebrand. The equity release products of today are far removed from what was available in the sector five, ten and twenty years ago. Increasingly we are seeing providers rebrand equity release using its technical term, a ‘Lifetime Mortgage’, to remove the historic taboo and allow customers to arrive at the products with fresh eyes.
Similarly the whole category of lending that includes equity release and retirement interest-only mortgages are being rebadged more broadly as simply ‘later life lending’ to reflect today’s customer needs and modern industry approach.
It’s important to remember that equity release is not suitable for everyone and comes with a range of risks, most crucially the compounding of interest over time. There are also a range of eligibility criteria in place to ensure that the industry continues to lend responsibly, for example property will usually have to be worth at least £70k in value and considered ‘standard’ in terms of construction.
With increased choice comes customer complexity and therefore it’s vital for anyone considering equity release to find a qualified advisor who is a member of the Equity Release Council and respects the due diligence process, communicates thoroughly with their customers and their families, and puts their customer’s needs first and foremost.
Find out more about Equity Release at Rest Less today.
Teddy Cenaj, mortgage advice lead at Rest Less Mortgages
