The total later life lending market is estimated to be worth £30bn but the core equity release (ER) market continues to punch well under its weight with less than £2.5bn of that total lending figure from lifetime mortgages. The challenges seen in the sector over the last two years are not going to disappear any time soon, but the long-term future remains exceptionally bright.
Anyone hoping for a rapid rebound in the market will be disappointed – the record-breaking £6.2bn of ER lending in 2022 is still a long way off with next year likely to see between £2.5bn and £2.7bn of lending. The past two years have been hard for the market and businesses specialising in this sector are going to need to adapt if they are to survive.
With total equity release lending in 2023 only reaching £2.4bn and shrinking further in 2024 to a likely £2.2bn-£2.3bn, it has been a significant dislocation in demand for the sector to adjust to.
The wider economy will not come to the rescue next year – the Budget increase in employers’ National Insurance will increase costs for firms which are already struggling.
Gilt yields are likely to remain high due to government borrowing pressures and geopolitical uncertainty, which will limit any reductions in lifetime mortgage rates and keep LTVs lower. That combination will in turn limit the number of new customers that can be served or who are willing to commit.
The more rapid growth in the ER market between 2016 and 2022 was fuelled by a combination of reducing rates and increasing marketing spend from the larger players in the market. This combination drove consumers into the market for all players to benefit from.
Right now, the opposite is true, with increasing rates and an almost complete removal of all above-the-line advertising. Awareness of equity release amongst our core consumers is diminishing with ‘search’ demand for equity release back to 2016 levels.
Strong foundations
In contrast to the short-term predicament, the strong foundations and drivers of the market remain in place providing confidence in its long-term future whilst squarely serving growing customer needs in later life.
Many in later life own considerable property wealth which should be getting put to work helping to maintain standards of living in retirement and addressing problems with pension provision. Later life lending can help customers manage their mortgage debt throughout retirement while also enabling them to assist the next generation through gifting.
Providers have transformed their products to meet customer needs. Lifetime mortgage lenders have tackled the need for innovative new products by offering higher LTVs, shorter early redemption charges and increased flexibility around regular payment options. Modern lifetime mortgages are a suitable option for a significant percentage of over 55s customers enabling them to actively manage their borrowing as their circumstances change.
That includes payment term lifetime mortgages which are designed to evolve with borrowers as they move into retirement, offering the option to eventually transition into a full roll-up product with a fixed interest rate for life and certainty of tenure once the mandatory payment terms have been met.
They meet the needs of people stuck on expensive standard variable rate mortgages due to affordability challenges or those worried about kicking the can down the road through a product transfer.
Many specialist advice firms have turned the challenge of Consumer Duty into an opportunity to increase the options available to customers and broaden their propositions.
So with all of this change, why is market growth so sluggish?
Building on the foundations
The combination of clear customer needs and an industry focused on innovation to meet those needs provides strong foundations for rapid growth in the years ahead. However, if consumers remain ‘unaware’ of these options, a lot of the effort around new products and specialist advice evolution will be in vain.
The industry needs to change how it engages with consumers at scale if it is to deliver on its potential. Key to that will be widespread adoption of later life lending and equity release across the mainstream advice market.
Mortgage brokers, IFAs, wealth managers and even workplace pension providers should be more engaged in helping over 50s customers explore all later life lending options. In a post-Consumer Duty world advisers should be expanding their field of vision to consider all strategies to deliver the best outcome for their customers – even if some of these extend beyond the scope of products/services they themselves offer.
For mortgage brokers this means looking beyond mainstream mortgage solutions and properly considering modern lifetime mortgages, RIOs, TIOs and long-term fixed rate products. For IFAs, wealth managers and workplace pension providers it should include considering property wealth within financial planning strategies – both in the accumulation and decumulation phases.
All advisers need to look holistically, beyond their own silo and commercial interests and consider how to support customers in achieving their goals through different life phases. The products to support this approach are already available and advisers need to catch up.
What isn’t realistic is expecting all advisers to be superhuman, advising across all products. What is more realistic are large scale ‘triage and referral’ models that refer customers to specialist advisers where appropriate, based on high-level triaging factoring in customer needs and affordability. These referrals need to be built with the customer experience in mind so customers feel well served and managed through the hand off process.
The same applies to regulators who should recognise that lifetime mortgages are a proactive planning solution. The FCA should acknowledge the 2014 Mortgage Market Review expectation that most customers will have repaid mortgages by retirement is no longer viable.
If mortgage borrowing beyond retirement is moving, in the FCA’s own words, from a ‘niche to a norm’, then later life lending also needs to move from a niche to a norm in the operations of the mainstream advisers. Some changes in regulation are needed here to force this change to happen.
The building blocks are in place to deliver a healthy later life lending market and next year is the ideal time to begin the wider change needed to ensure it can grow to meet the growing needs of customers. Change is needed now to reap the longer-term rewards.
Chris Bibby is managing director at Key Group
