Later-life lending ramps up – Mortgage Strategy
The later-life lending market has experienced phenomenal growth in recent times, due in part to greater life expectancy and rising house prices but also to soaring inflation.
Once the reserve of specialist advisers, the sector is starting to steer towards the mainstream market and is increasingly on brokers’ radar.
Given the breadth of products the later-life market encompasses and the wide demographic of borrowers it serves, it is perhaps not surprising that some brokers are opting to advise on the products themselves, rather than outsource.
We are seeing more discussions about taking interest-only into later life
As later-life lending volumes have increased over the years, so too have the professionalism of the market and the safeguards put in place for borrowers. Yet at times the sector is still haunted by its chequered past. Just last summer the Financial Conduct Authority wrote to equity release providers to warn that borrowers under financial stress might be susceptible to purchasing an unsuitable product.
Nevertheless, as demand for later-life lending continues to grow, brokers feel they cannot afford to ignore this segment of the market and its growing number of borrowers in need of assistance.
Equity release was one of the fastest-growing corners of the later-life lending sector last year. New lending reached a record £5.58bn, up 27% on 2021, according to Key Later Life Finance. The equity release adviser’s Market Monitor shows the number of new plans reached 52,295 in 2022 — up by a quarter year on year.
Key chief executive officer Will Hale describes last year’s market as a tale of two halves.
“January to September, the market was starting to recover from the pandemic and there was a return to more aspirational spending, which we did not see in 2020 and 2021 due to Covid restrictions,” he says.
I see a huge opportunity to expand the mindset of those who have never considered this option
“In mid-September the mini-Budget was announced and the British financial markets were immediately impacted. The later-life lending sector was not immune. Interest rates increased, LTVs decreased and providers withdrew products. This significantly changed the product landscape and ultimately affected customers’ ability to release equity from their homes.”
Although interest rates started to dip slightly in the fourth quarter of 2022, equity release for discretionary spending became less attractive.
Hale adds: “Debt management became a key theme, with older borrowers — trapped on lenders’ standard variable rates or owing a large interest-only lump sum payment, or unable to make their repayments — considering whether accessing housing equity might be an option.”
Later-life advisers can mentor on aspects a broker may not have met
Key’s figures show the average amount released last year was £106,806, with around £3.3bn of the property wealth released used to repay unsecured or secured debt. Around half was used to repay an existing mortgage while 38% was used to re-broker existing release plans and 12% to pay off unsecured debts.
Just 20% of customers used some or all of their released property wealth to gift money to relatives, while 14% utilised it for holidays.
The average age of equity release customers in 2022 was 71, according to Key, with just 6% of customers under the age of 60.
Of course, equity release forms just one strand of the later-life lending market and brokers are also seeing an appetite from borrowers for more standard products.
The sector has evolved so much and there is more to come
“We are seeing more demand from older clients looking to take out equity to help their children and grand-children onto the property ladder,” says Alexander Hall director of partnerships Stephanie Daley.
“With the end of Help to Buy, a number of would-be first-time buyers have lost that opportunity for the deposit boost.
“Due to rising rates and continued affordability challenges, we are also seeing more discussions surrounding taking interest-only into later life; not necessarily specific retirement interest-only products but those lenders that have flexibility with the maximum age at the end of the term,” she adds.
Given the occasional overlap between advice around standard mortgage products for older borrowers and that for more specialised areas such as equity release, it makes sense for some brokers to broaden their advice to encompass both.
Releasing equity is not a short-term undertaking and some clients may regret taking out a loan today that potentially accrues cost over the rest of their lifetime
The Mortgage Mum managing director Sarah Tucker recently decided to offer an in-house later-life proposition, having previously referred cases. This has meant a change of direction for the firm’s usual online-only strategy, with face-to-face advice also incorporated into its later-life proposition.
Tucker describes some of her reasons for branching out.
“People need alternative, creative solutions to their financial concerns,” she says. “More people will need to access their equity later in life, due to longer life expectancy and the rising cost of living.
“I also see a huge opportunity to expand the mindset of those who previously would never consider this an option due to the horror stories of the past and the lack of education.
Releasing equity should not be the default option; in many cases it should still be viewed as a last resort
“The sector has evolved so much in the past few years and I believe there is more innovation to come. The challenges will be in truly allowing future clients to trust in this as an option.”
Indeed, despite all the ways in which the later-life sector is aligned with the mainstream market, there are still vast differences when it comes to the advice process.
“People in later life need access to good advice rather than a brokered product, says Society of Later Life Advisers (Solla) joint chairman Jane Finnerty.
Solla is a not-for-profit organisation that offers an accreditation scheme and standards for advisers that sit alongside the CeRER equity release qualification and CeMap.
The challenges will be in truly allowing future clients to trust in equity release as an option
“It’s important to look to work alongside experienced later-life advisers who can mentor and advise on aspects a mortgage broker may not have encountered but needs to consider, such as care funding and other in-retirement advice requirements such as income needs and inheritance tax planning,” says Finnerty.
She emphasises the need to both be aware of and understand the circumstances that pertain to older and potentially vulnerable clients.
“Understanding power of attorney and the role of family members, where involved, is more important too,” says Finnerty. “Rates tend to be higher for equity release so the compounding effect of rolled-up interest, if repayments are not being made, needs to be explained carefully to clients.
“The impact on other later-life options, such as some benefits and access to care funding, can be affected too.”
The FCA’s ‘Dear CEO’ letter to equity release providers last summer flagged the importance of protecting vulnerable borrowers from unsuitable advice.
It’s important to work alongside experienced later-life advisers
The StepChange Debt Charity, which also runs an equity release advice arm — StepChange Financial Solutions — meets a lot of borrowers who turn to later-life lending in an attempt to solve another financial problem. Its financial solutions manager, Andrew Kerry, believes the up-and-coming Consumer Duty rules should keep advisers focused on ensuring their advice is relevant.
“The fundamental tenets are that the client has needs that need fulfilling, and that they fully understand the product,” says Kerry.
Nevertheless, he cautions: “There is still a potential for poor client outcomes. The cost-of-living crisis is driving demand for, possibly, a short-term solution to a temporary problem.
“Yet releasing equity is not a short-term undertaking and some clients may regret taking out a loan today that is then potentially accruing cost over the rest of their lifetime.
Advisers will need to work harder to secure their customers the best deal
“This should lead to more robust conversations between adviser and client; thoroughly exploring the alternatives to borrowing, such as moving to a smaller home, budgeting or seeking debt advice.”
Kerry adds: “Releasing equity should not be the default option; in many cases it should still be viewed as a last resort. In those circumstances, where it fulfils a need that cannot otherwise be met, the product is suitable.”
Just like the mainstream market, the later-life sector will face challenges in the year ahead.
“2023 will be a tougher year than 2022 given the interest rate environment and the concerns about a potential house price correction,” says Hale.
“Lower LTVs and providers being more cautious are likely to see loan sizes fall. Advisers will need to work harder to secure their customers the best deal.”
People need alternative, creative solutions to their financial concerns
However, Hale believes the long-term drivers of the market are positive and, as interest rates settle, more people will turn to their housing equity for support.
Given that the majority of later-life lending is advised, the market represents a huge opportunity for brokers.
Holistic and personalised advice will be crucial if the sector is to continue to grow and also reshape perceptions.
The adviser community must be at the forefront of helping to achieve these aims.
This article featured in the February 2023 edition of MS.
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