What does the future hold for equity release?

Demand for equity release has increased, despite scepticism. Fiona Murphy looks at the results of this Retirement Planner Inquiry

Figures from trade body SHIP and from providers show that demand for equity release is growing, ­particularly over the past few ­quarters of 2011.

This month's Inquiry asks how and why advisers are seeing this level of growth. We also want to know what challenges they face in advising clients on releasing capital from their home, which can be a difficult subject.

As with previous Inquiries, we sent out an online questionnaire to our readers, with 145 advisers ­taking part in the survey. We asked first whether these respondents ­advised on equity release. Only 54% confirmed they did. The remainder, who said they did not, were screened out at this point.

We then went on to determine the level of demand for equity release that advisers had seen over the past year. Less than half of advisers (40%) said demand had increased by a small extent.

Following closely, 37% of survey participants said it has stayed the same. Next, 11% said they have seen the popularity of this choice increase to a large extent. Yet ­paradoxically, a further 10% said need had reduced by a small extent (see chart one).

Next, we wanted to hone in on what products were having the highest levels of take-up. The majority (55%) said drawdown lifetime mortgages were the most popular. Lump-sum lifetime ­mortgages followed closely behind, with 41% believing this was the market preference.

Finally, home reversion ­mortgages proved to be the wallflower of the group, with only 4% of respondents believing this was the dominant product choice.

Consumer demand

Advisers were then asked for their opinions on why certain products were more widely used than ­others. When asked why a drawdown lifetime mortgage was attractive, the recurring answers were lower ­interest charges, ease of ­understanding and flexibility.

The respondents defined ­flexibility as access to capital as and when required or the ability to fund ongoing expenditure.

Those who favoured home ­reversion plans produced ­interesting, if controversial, responses. One adviser described the mortgage route as a "legalised robbery" and a "rip-off", with home reversion as the "fairer" option, at a push. Another said its benefit was "security regarding percentage of property left to beneficiaries".

Moving on from the products, we wanted to assess how consumer need was driving the market. We asked: Why are people choosing to take out equity release?

Less than a quarter (24%) felt people were utilising it to repay debt. Other responses included paying for holidays or lifestyle enhancements (23%) and for home improvements (13%). School fees for children and ­grandchildren was surprisingly off the agenda, ­reflected by just 1% of advisers (see chart two).

 But the biggest response was "other", with 27% providing their own answers. The range of ­responses was vast, from those who believed it was to increase income to those who argued it was to ­maintain a certain standard of ­living. Others claimed equity release was taken out for care fees, to help children with debt or other ­financial obligations, or for ­inheritance tax planning.

Still looking at people's ­perceptions, we asked what ­challenges advisers face when ­discussing ­equity release with ­clients. More than half of ­participants (52%) warned the term "equity release" continues to carry negative connotations.

A worrying 39% explained those seeking advice from an IFA did not understand the products. A quarter blamed insufficient product f­lexibility, while 22% believed there was a lack of providers in the market.

In the "other" category, early repayment charges, poor value for money, high interest rates and ­provider commission non-­disclosure were all listed as issues encountered in the advisory ­process.

Lack of awareness was also cited (understandably among clients), but one adviser said solicitors and accountants do not understand the products - a cause for concern.

Market evolution

Next, we tried to gauge how advisers felt the market was evolving. We asked whether advisers would agree with market commentators who believe the equity release ­market is about to turn a corner.

More than two-fifths (41%) said yes, they believed this was the case. But a further 39% said they didn't know, suggesting a sense of uncertainty in the sector. Finally, a fifth said no, equity release was not turning a corner.

So, we asked our advisers to ­expand on their thoughts. Those who voted yes were ­unequivocal, arguing that equity release ­provides a ­solution for those finding their finances depleted by personal debt, inflation and low interest rates.

Others believed the market would evolve as those who made insufficient provision for their ­retirement would be expected to turn to equity release.

Other factors included a change of thinking - for instance, as one adviser said: "The older generation are starting to realise that there is no sense in holding on to the c­apital for another 20 to 30 years for their children, when their children need it now". Alternative responses included longevity issues, an increase in domiciliary care and a "stagnant housing market", whereby it would seem more practical to stay put and release capital from within the home.

Those who answered no cited a lack of evidence for market evolution. Another adviser believed there ­continued to be "a steady demand for genuine cases" rather than sweeping changes.

A sense of scepticism prevailed against the idea equity release is turning a corner, as some advisers asserted: "I have heard this said for the last ten years" or the product is continually cast as "the next big thing".

Negative views continue to exist among the advisory community. One adviser doubted that equity release would take off in any significant way: "I don't think homeowners in this country will ever quite get over the idea of once having worked hard and paid off a mortgage to then take one out all over again."

Another said they would only recommend equity release to ­clients as "a last resort." Negative perceptions in the media were also mentioned as it still casts a shadow over client views.

Financial reasons were also raised, from high rates to the ­property slump "offering less ­potential for the increasing loan value to be counter-balanced by ­increases in property value - ­making it more costly over time".

Similarly, those in the "don't know" camp stressed ­their doubts: "It will be become more ­popular, but I am uncertain of the ­time-scale," said one adviser.

Some even asked "Which corner: positive or negative?" This is symptomatic of some of the wider doubts that prevail in this sector.

Room for improvement

With these misgivings, it ­appears that equity release ­continues to divide opinion among advisers. The feedback gave us a kaleidoscope of views and client anecdotes, which suggest for some, the sector ­remains on shaky ground, despite the rise in new business. 

As we see the baby ­boomers ­retire and personal finances squeezed ever tighter, equity ­release is likely to become more prevalent. Providers and ­advisers will have a lot of work to do to ensure the product is more widely viewed as a safe, viable option for retirees, as well as an active choice to enhance ­retirement, not a last resort.

Chart One - Chart one: How have you seen demand for equity release develop over the past twelve months?

11%                It has increased to a large extent

40%                It has increased to a small extent

37%                It has remained the same

10%                It has decreased to a small extent

3%                  It has decreased to a large extent

Chart two: Why are people choosing to take out equity release?

24%                To repay debt

23%                Holidays/lifestyle enhancements

13%                Home improvements

1%                  Children/grandchildren's school fees

13%                All of the above

27%                Other