In this month’s issue of Positively Speaking we delve into the world of equity release and later life lending. In a growing market and as more individuals seek financial flexibility in their golden years, understanding the intricacies of these options becomes crucial. In this issue, we are joined by a panel of market leading lenders to provide insights into the latest trends and products available to the later life market.
The Panel
David Coleman, Head of Sales at Positive Lending
Sanjay Gadhia, Head of Sales at Standard Life Home Finance
Scott Burman, Head of Distribution at Pure Retirement
Kieran Mullen, Business Development Manager at Canada Life
Scott Marshall, Managing Director at Roma
DC – What are the current trends in the equity release market, and how do you see the sector evolving over the next five years?
SG – From what we have seen at Standard Life Home Finance, this year our Horizon lifetime mortgages have supported customers in a number of ways; from covering care costs in later life to purchasing discretionary items such as cars, holiday homes, or going on holiday. The more common trends have included repaying existing mortgages, gifting to family or friends, carrying out home improvements, and paying off unsecured debt such as credit cards or loans. We have seen some product enhancements already this year, with lenders creating or evolving their existing propositions, and I am confident there will be more product innovation throughout 2024 and beyond.
SB – I think it’s incredibly difficult to accurately predict the market in five years, when we take a step back and look at how far we’ve come over the last five. Over that time period we’ve seen lifetime mortgages and equity release become a far more mainstream Financial tool among over-55s, irrespective of background or social class, and a solution that people are increasingly comfortable using to achieve a variety of financial goals – whether that’s home improvements, debt repayment, car and holiday purchases, or gifting to family. Looking at current trends, what’s evident is not only the way that people are using modern lifetime mortgages equally for needs-based and aspirational reasons (our Q2 data shows that debt repayments and home improvements jointly occupy the most popular loan usage reason), but that lumpsum customers are more likely to use funds for aspirational reasons, and drawdown customers are more likely to use funds for more lifestyle/aspirational means.
KM – It’s been a difficult 18 months or so no question about that! We’ve seen rates increase and LTV’s decrease across the market but, and as a result of that, we’ve seen the amounts that clients are borrowing on average in 2023 reducing by over 20% vs average release in 2022. We’re still seeing clients using our products to clear off mortgages and make home improvements however we’ve seen a drop off of using them to gift. Clients are still gifting to family for a variety of reasons – university fees, help getting on the property ladder but less of it being used for IHT purposes which given current market rates is understandable. Smaller initial advances and cash reserve facilities tend to be the norm in 2024 allowing clients to borrow what they need as and when they need it and help manage compounding interest.
DC – How do you think understanding customers is helping to shape lifetime mortgages through product innovation?
SG – We are continually developing our understanding of our customers, through in-depth research to support our product innovation. In response to the rising cost of living and higher rate environment, we have developed a new product innovation, Horizon Interest Reward, that can help customers reduce their total cost of borrowing through discounted interest rates and the ability to service some or all of their interest for an agreed payment term.
SB – As an industry, we’ve been in something of a virtuous circle in recent years of product development and have a diversified customer base when it comes to demographics and priorities. Our recent figures for Q2 show one in five people are using released funds for cars and holidays, and one in five new plans are coming from owners of properties of at least £550,000. Not only does this underline the need to produce solutions that cater for a range of needs, but it also helps to dispel the notion that later life lending is the resolve of needs-based borrowers from lower socioeconomic backgrounds. I think the important thing is that, as an industry, we understand these customer trends and feed it into future developments to ensure we continue to meet a wide array of customer needs when they decide that later life lending is something they want to explore.
KM – Understanding customers is massively important. I think although we’ve had some product innovation in the market already we are still very much in an R&D phase of innovation and it’s important that providers listen to what feedback advisers are reporting. If clients want to commit to paying more given the interest rates then we should be looking to support them. It’s important that we listen to what’s being said and read between the lines to try and grow the market going forward.
DC – How have recent regulatory changes impacted equity release and later life lending, and what further changes do you anticipate?
SG – The conversation regarding affordability was a focus of the recent regulatory changes. The introduction of Consumer Duty ensures solutions, guidance, and advice are clear and transparent, allowing prospective customers to understand the implications and benefits of a later life solution. We welcome these changes and fully support working with regulators and industry peers as a result.
SB – If we look at something like Consumer Duty, these sorts of reviews and regulatory implementation highlight the importance of not only providing accurate advice but also evidencing it. As a lender, it only underlines how vital providing financial advisers with the tools, resources, and support continues to be if we’re to provide customers with the best outcomes. This can take the form of easily available explainers about equity release as a whole and a lender’s specific products, case studies that highlight how a lifetime mortgage could be used under various circumstances, or repayment calculators that help customers decide whether making optional repayments is the right solution for them.
KM – Consumer duty is in full swing of course and we’ve seen a number of firms rebrand from ER specialists to later life specialists highlighting their ongoing commitment to making sure their clients are informed of all their options and avoiding the stereotype of not just steered into a lifetime mortgage when it may not be the best solution. The “open book” phase of consumer duty has led to many positive and proactive changes from advisers and providers alike. The “closed book” phase relating to consumers on products which are no longer sold will be more difficult in my opinion due to the cases being older (and potentially having changed hands) but I am very positive as a market we will rise to the challenge in the same way.
DC – What are the latest innovations in equity release products, and how do these new products benefit consumers?
SG – With affordability being a key focus, particularly on the impact of payments on the total cost of borrowing, we have seen significant innovation in our industry this year. We launched our Horizon Interest Reward lifetime mortgage, which offers customers with the ability and desire to make payments for a term of 5, 10, or 15 years, a discounted interest rate . This plan may allow customers to benefit from a lower rate compared to traditional lifetime mortgage plans and gives them control over the impact of interest on the total cost of borrowing.
SB – We’ve understood the power that product innovation can have and have taken an approach of constant improvement to our lifetime mortgages. Over the past month or so alone we’ve increased LTVs on our Classic and Emerald ranges, while the latter has also benefitted from the addition of drawdown options, in line with all of our other products and meaning all of our ranges now offer this type of plan. We’ve also increased maximum age on Emerald (initial and further borrowing) and Classic (further borrowing) to 90, providing those in higher age brackets more borrowing options.
KM – We’ve seen a return of interest servicing products where clients can commit to servicing interest for a reduction in rate and PTLM where clients commit to paying monthly interest for an agreed period allowing them to borrow more than they would get on a standard lump sum lifetime mortgage. The real problem the industry has at the moment is we are struggling to service clients with high value mortgages outstanding or due, so anything we can do to reduce rates and in turn increase LTV’s is welcome. More to come from lenders across the board I reckon so watch this space!
DC – What do you see as the biggest challenges facing the equity release and later life lending industry, and how should the industry address these challenges?
SG – The industry must continue educating advisers and customers about the flexibility of modern lending features that apply to lifetime mortgages, compared to those available a decade ago. Features such as early repayment charge (ERC) exemptions, the ability to make ad-hoc or voluntary repayments, and the option to downsize if they wish, are often misunderstood. We are now in a new interest rate environment, when compared to what was seen two years ago, and we expect this to remain for some time. It is therefore important for advisers to educate customers on how they can impact their total cost of borrowing, as well as keeping up to date with the latest product innovation, such as Horizon Interest Reward, that may be able to support customers in reducing the cost of borrowing.
SB – I don’t think it’s any great secret that the wider economic landscape has presented a challenging backdrop for businesses, with heightened interest rates and eroded consumer confidence as the results. However, I think it’s important to note the increased industry resilience relative to comparable rates and market conditions. We saw similar rates back in 2018 and considered it a landmark achievement to hit £1bn of lending for the year, while last year we saw £2.6bn. While it may not be up there with the market’s peak, it underlines the market’s growth over the years. This is partly due to consistent product development from lenders (and product standards from the Equity Release Council), which have helped to capture a more diverse audience base and continues to provide a solid bedrock for market growth.
KM – There ‘s a few challenges as an industry we need to address:
1. We need to continue to educate our customers on market volatility and how the rates of today can accumulate some big figures on what are long term loans.
2. As a financial services industry we need to become more comfortable with property being used as an asset for decumulation in retirement and being considered within cash flow modelling forecasts. We are comfortable already using pensions, bonds, ISA’s etc but there is a reluctance to use the property as a tax efficient way of financing retirement.
3. As lenders we need to innovate our product suites so that they are appropriate for the customer and market as it is today mitigating risk for both the lender and their consumers.
4. And lastly there needs to be ongoing collaboration with the regulators of the market. Clearer guidelines and capital adequacy requirements that ensure long term sustainability of the market but also foster responsible lending.
DC – What initiatives do you have in place to educate potential customers and the market about equity release, including the benefits, risks, and long-term implications?
SG – We have a customer-facing website providing information about our lifetime mortgages, including features and benefits, as well as associated risks and implications. For advisers, we offer educational webinars about our proposition and the wider market, in addition to resources and support assets for advisers on our website’s Adviser Zone. We collaborate with key distributors and the Equity Release Council to maintain engagement and support, and post-Consumer Duty, our fair value assessments are available across the entire Horizon proposition, including Horizon Interest Reward.
SB – As a lender we have limited contact directly with the consumer prior to issuing an offer. However, we appreciate the need to support the adviser in helping their client to make an informed decision that works for them. To this end, we’ve provided a guide to equity release as part of our marketing toolkit, allowing advisers the chance to dual brand it and give to advisers as part of their initial meetings with clients. Our offer pack also explains the process in detail to applicants, ensuring they fully understand the implications.
In terms of advisers, we’ve a wide range of resources available to help them make the most of the market, including webinars and educational guides. Ahead of Consumer Duty’s implementation last year we also created a bespoke suite of resources to ensure advisers were prepared, including 5 webinars with industry professionals and a series of blogs explaining each principle in detail.
KM – Canada Life has an extensive document library available to anyone and everyone on equity release, the benefits and risks and their own product suite which highlights some fantastic features available to consumers. We regularly attend roadshows and events discussing the lack of option in retirement for the current generation approaching retirement and how equity release can be used as an asset within a retirement plan. It’s not the right solution for everyone but if this info helps a client be mortgage free in retirement or enjoy a holiday of a lifetime while they are still fit and able then education is key to that being realised.
DC – How flexible are your equity release products in terms of repayment options, and can clients make voluntary repayments without penalties?
SG – All our lifetime mortgages are 5 star rated by Defaqto and meet Equity Release Council standards, allowing customers to make ad hoc or voluntary payments. At Standard Life Home Finance, customers can make repayments of up to 10% of the initial loan amount in any 12-month period without incurring ERCs. Also available to customers opting for a Horizon Interest Reward lifetime mortgage, customers can make these ad-hoc repayments in addition to their committed monthly interest payments.
SB – In line with Equity Release Council product standards, all of our products offer a penalty-free repayment provision, allowing customers to make ad-hoc or regular optional repayments up to a set amount without incurring any additional charges. The annual allowances for our products are:
10% of the initial balance on Classic and Sovereign
12% of the initial balance on Emerald
20% of the initial balance on Heritage Freedom 20
40% of the initial balance on Heritage Freedom 40
KM – We are very comfortable with clients making payments and have great flexibility in allowing them to do so. 10% of the initial loan amount can be repaid each year with an unlimited amount of contributions being made within that 10%. Clients can service the interest and/or capital in a variety of ways – via BACS, cheque or standing order allowing them to remain in total control of if and how much they would like to pay on a monthly basis.
DC – How do your equity release products address the risk of negative equity, and what guarantees do you provide to protect the end consumer?
SG – Affordability is a central focus when advising on later life solutions. Our Horizon Interest Reward lifetime mortgages help customers reduce their total cost of borrowing and, where necessary, maintain or increase the inheritance for beneficiaries. All our plans meet Equity Release Council standards, ensuring customers are protected by the no negative equity guarantee. We offer a short early repayment charge period of only eight years, allowing customers to redeem from year nine without ERCs. Our plans also include features like downsizing protection from day one and an unrestricted ERC exemption period for joint applications. If one customer passes away or moves into long-term care, the remaining customer will have the freedom to redeem their lifetime mortgage ERC free.
SB – As with all members of the Equity Release Council, all of our products offer a no negative equity guarantee in line with their product standards. This ensures that once a plan is taken out, the amount owed will never exceed the value of the property at the point of redemption.
KM – As proud members of the equity release council we ensure our products adhere to the no negative equity guarantee (NNEG) ensuring the customer will never owe more than their house is worth. This means the customer is entitled to not make payments if they wish and the interest will simply roll up and regardless of this roll up and we would be repaid on sale of the property for the sale price only as a maximum. This provides consumers with confidence that their families and beneficiaries will not be saddled with a debt on their death or LTC commencing.
To find out more about how Positive Lending can support your later life lending clients,CLICK HERE to visit our Later Life Lending Page