Richard Collinson – RetireEasy     Baroness Wheatcroft of Blackheath, in her introduction to a recent report by The Smith Institute, said: “Hope I die before I get old,” yelled The Who in 1965. For many of those who grew up in the Sixties, the sentiment now is as likely to be “Hope I die before I get poor”.

How true!  The fact is that we must find ways to enable older people to access their assets to supplement their income in retirement. 

Equity Release Plans, including Lifetime Mortgages, have a somewhat mixed reputation. On the one hand they do give many in retirement the only opportunity to continue to live in their homes whilst releasing funds to cover living expenses or one-off cash needs. On the other hand, they have been seen as very expensive and lacking in flexibility.

However, I believe the times they are a’changin’ and these products will, in the near future, move into the mainstream. There are some good reasons for this:

1. As the population ages and people spend more and more years in
   retirement, the pressures on their resources will only grow. At the same time
   offspring will increasingly be themselves middle aged or older when their
   parents pass away, reducing the need to pass on inherited wealth.
2. With the ending of final salary pensions and the continued
   unattractive annuity rates, more and more retirees will be relying on drawdown
   plans with the associated risks. In any event, certainly in this economic
   climate, returns on investments by themselves are rarely sufficient to enable
   retirees to live the lifestyles they desire.
3. As demand for these products grow, more and more providers will
   enter the market. It is an attractive one for lenders since the risks can be
   relatively low, especially if the borrower pays interest regularly.
4. The fact that Lifetime Mortgages are fixed rate for their full
   duration (unlike regular mortgages) means that the borrower knows at the outset
   what repayment will be required at any future date.

There are, however, some obstacles standing in the way of widespread use of these products:

1. There is a poor public perception of the idea of Equity Release, reinforced by some previous bad publicity.
2. Many older people are reluctant on principal to contemplate giving up an element of the equity in their home and so limiting the amount
   that can be left to their children
3. Lenders have a number of issues to consider when entering the
   market, including the need to source 20 or 30 year fixed rate funds, especially
   where interest is being rolled up and where earlier than forecast repayment may
   occur if the borrower(s) pass away earlier than predicted (although a large
   volume of business should mitigate this risk). Also, they have to consider both
   the life expectancy of borrowers and the potential performance of home values
   over that period as they may well not have any other source of repayment.

As a result, take up has been very low. According to the Smith Institute report, the lifetime mortgage market has averaged around 22,000 sales and just under £1 billion of lending each year over the last five years, with an average of £45,500 per transaction.
This is equivalent to less than 1% of the residential mortgage market over the same period. The home reversion market is even smaller, with less than 1,000 plans sold per year.

The range of providers is extraordinarily limited. The membership directory of the Equity Release Council (the industry body for Equity Release) listed only 11 providers, of which only 3 are mainstream insurance companies. There are no banks or building
societies listed, although it does appear that one or two building societies are now entering the market.

So what is happening to make Equity Release products more mainstream?

Well, in March 2012 the Smith Institute report recommended that the government intervene to bring the banks into the market and that measures be implemented to broaden the range of products available, reduce interest rates and improve public perception of the market.

The banks must be encouraged to move heavily into this market.

There is another benefit that would accrue if steps to widen the demand for Equity Release are successful. A huge amount of money would be released into the real economy to be spent by the retired population on everything from food and energy bills to cars, clothing, home improvements, holidays, dining and entertainment.

In my personal view there is nothing strange or culturally ‘wrong’ in the concept of releasing funds from one’s home in order to finance one’s retirement.

Quite the opposite! The potential benefits for individuals, lenders and the wider economy make Equity Release (especially Lifetime Mortgages) absolutely essential as a mainstream and fully accepted practice.

RetireEasy is working on the inclusion in our LifePlan and LifePlanPro products of an enhanced capability to model various Lifetime Mortgage and Home Reversion scenarios.