What’s driving growth in the equity release market?

Fiona Murphy finds out how the market is evolving in line with consumer demands and financial growth

Equity release is on the up - or so the figures ­suggest. Trade body SHIP has seen the highest increase in sales and borrowing figures among lenders in Q3 2011 since Q1 2010. Meanwhile, retirement specialist Saga has reported year-to-date growth of 126% for its equity release advice service.

Does this growth signify the ­beginning of much-anticipated growth in the equity release ­market? Or are the figures merely a blip in a volatile arena? Certainly the growth has occurred over a ­relatively short period of time and can be offset against the fact the market has endured difficult times over recent years.

As SHIP's director-general Andrea Rozario explains, the sector was "hit by the credit crunch" and although providers and lenders "didn't see the same drops in business as with the normal mortgage market", there was a definite impact.

In addition, several providers dropped out over the past four years, adding to the market's woes. Vanessa Owen, head of equity release at LV=, admits some of the encouraging figures could be ­"accounted for by the interest-only service mortgages coming into the SHIP figures that will have made some difference".

However, she adds the bulk of the figures reflect "a general uplift in people looking at equity release for a variety of reasons".

From what providers and advisers are saying, there has been a marked shift in the profile of the equity release client, which is driving new business. Owen says: "There is an increase in enquiries ­coming through from high net-worth customers, and people who have got larger houses they're keen to extend or to make significant maintenance changes to them.

"It has been steadily ­increasing, but it is really noticeable now. There was a time you might see one enquiry every three to four months. Now, we see them most weeks."

The role of debt

Wealthy individuals are clearly making different financial choices as the economy tightens its grip, with people across the board turning to equity release for reasons that may not have been widely explored in the past. In particular, the baby boomer generation is saddled with debt, with many reaching retirement without having paid their mortgage off.

As Sixty Plus ­managing ­director David Wright ­explains: "It's partly the economy, partly ­having mortgages dragging on longer than they should have, or endowment shortfalls or ­endowments being surrendered in years gone by and not replaced.

"The balance often isn't huge, but the lender says ‘You've got to pay this by the time you're 75', [which] creates a ­situation that's not affordable."

He cites a growing issue with "the intransigence of mortgage ­lenders, who are forcing people into repaying mortgages over a limited number of years that clients simply can't afford. They have to turn to equity release as a mortgage".

So, many pensioners are releasing capital from within their own walls to afford to stay in their home. What else is on the horizon?

Personal debt also plays its part, with the average person over 55 ­owing £20,001 (excluding a ­mortgage), according to Aviva's seventh Real Retirement Report.

Many equity release enquiries are flowing from those who wish to use the capital within their home to clear the decks at this stage of life. In addition, pensioners are feeling the squeeze on their finances from other ­avenues, more markedly than other social groups.

Headline inflation is also ­causing real pain for ­pensioners. As many live on a fixed ­income, they can find their ­spending power ­being rapidly slashed by soaring food and utility bills. If retirees are unable to keep working, then equity release is another option that can be utilised to provide extra income.

Another factor behind the increase in ­equity release business could be down to a growing number of providers in the market.

Darren Dicks, Aviva's head of at-retirement trading, has been keeping a close eye on competitors. "I think we have seen an increase in provider activity. We've seen Partnership and More 2 Life join the market, which is really encouraging. If you go back three or four years, there were 12 to 14 providers in the market. Last year, there were only three really ­active providers.

"It is not good for any ­market to have a small number of ­providers in it. We welcome new providers as it increases awareness, not just among consumers but among advisers."

While this increased provider activity is good news for the sector, more needs to happen if equity release is to really develop. Claire Barker, chairman of the Equity ­Release Solicitors' Alliance, says that in theory, a provider such as a high street bank could help to introduce visibility of the product and greater public awareness.

However, she adds: "We would not expect people to go direct to lenders because it is not in their best interest to do so in most ­circumstances." People still need to seek advice from an IFA and explore the full range of options, as products become more accessible to the general public.

Alongside the competition, ­providers have upped their game in terms of the service they offer. As Wright explains, there has been a trend towards "lenders who will use medical underwriting for those with health or lifestyle ­impairments to advance a higher loan-to-value".

The use of medical underwriting will no doubt have a greater role to play in the future. In addition, products are also being offered with inheritance guarantees to further meet the needs of the client.

Rozario believes people will increasingly see products developed to help with ­issues such as funding long-term care in future.

Changing perceptions

At first, it would seem the ­products on offer are evolving. But are ­advisers moving with the market?

Wright warns: "I still come across members of the public and IFAs who have the wrong ­impression of equity release."

It appears the product ­continues to be catered for by a small number of ­advisers. Others are reluctant to touch it, due to doubts about the safety of the product or a lack of ­experience and knowledge.

As Owen adds, it is not the right advisory route for every IFA: "It does suit some people more than others. If you're a very transactional sort of adviser,  you'd find equity release is not the market for you because of that longer process and the number of people you need to be involving, such as their family."

Advisers currently operating in this space are specialists, not generalists, which could also account for why the market remains so niche.

Rozario defends this trend: "You have to be qualified. It is not a ­complicated process, but one that has a good level of information, skill-set and expertise."

Rozario adds she was "not ­saying an adviser can transact a small amount of business and not be equally as professional - they are more likely to find it harder ­because they are not necessarily up to speed in the same way".

Increasingly, more advisers are engaging in partnerships with suitably qualified advisers, meaning that any equity release cases will be referred to a specialist ­adviser.  

As inflation, poor annuity rates and shrinking pension pots bite harder on retirement incomes, ­pensioners will need alternative solutions to fill the gap in their finances. 

Downsizing to release ­extra ­capital no longer seems an ­option due to the sluggish ­property ­market. With many retirees ­preferring to stay in their own home, equity release could prove to be a viable option.

But too few pensioners factor their home as an asset in their overall retirement strategy ­beyond passing it on to children and ­grandchildren. What more can be done to further increase awareness of equity release?

Maintaining growth

Firstly, the industry is calling for greater publicity. Equity release is still seen as a niche market.

Wright says: "The industry needs to do as much as possible, and SHIP as a trade body should tap into the mass market's media distribution to get the message across. The key should be putting things in as ­positive a light as possible, in as much media as possible."

Alongside media work, SHIP is lobbying government, which ­Rozario says has produced ­positive feedback, as with the issues of the rapidly ageing society, there is ­"understanding and acceptance with politicians there has to be a role for housing wealth".

Alongside SHIP's work, voices within the equity release sector have been calling for reforms, to ­enable the market to grow further.

Steve Lowe, external affairs and customer insight director at Just Retirement, is calling for a ­"harmonisation on taxation around pensions and property, which could lead to increasing product ­innovation." And with the eagerly anticipated White Paper due next year, many are wondering if the government has picked up on the Dilnot Report's proposals, where equity release is suggested as a mechanism to fund long-term care.

While the equity release ­sector is expanding, it has still not ­rebounded to figures prior to 2008, and so more will need to done to sustain continued market growth. It is vital that financial advisers and providers ensure people are aware of all their financial options in retirement.