Aaron Conlon, Managing Director of Fluent’s Equity Release division, discusses the performance of the later life lending sector throughout quarters 1 and 2 of 2023, how the sector has evolved and considers the myths and facts of later life lending.
Later life lending: A flourishing landscape
When the Default Retirement Age was scrapped in 2011, nobody could have predicted the impact that this would have on the later life lending space. And with the significant increase in average life expectancy, which rose from 72 in 1975 to 81 in 2020, it’s little wonder that a growing number of people are closely monitoring their retirement plans.
The face of modern living for over-55s has changed somewhat due to later life expectancy and the rising cost of living. Put simply, we live in an ageing population – the Office for National Statistics says there are more over 65s than ever before in England and Wales1 – people are living longer, have considerable property wealth and are looking to get much more out of later life. This has catalysed the need for fresh thinking and product innovation, to meet the needs of consumers either entering or in the stages of later life.
Meanwhile, it’s hard to escape the news of soaring house prices, and the challenges that people have been finding when trying to enter the housing market (or continue their journey on it). As soon as the pandemic ceased to be front page news, it seems that the world was thrust into a different kind of crisis, but one this time that affects our wallets. Consequently, every industry and market is feeling the squeeze, but you could argue none more so than the mortgage sector.
Naturally, any movements within the property market impact the later life lending space too, but what effects are currently being felt and what can we potentially see going forward?
Changing the face of later life lending
While the first half of 2023 has undoubtedly been a challenging one in the later life lending space, Q2 has shown a greater degree of promise, with total lending for equity release reaching £664m between April and June2.
According to Equity Release Council, the number of active customers rose to 17,028 in Q23, and a deep dive into why our clients are accessing their equity tells an interesting story. Traditionally, people passed down equity as inheritance, but an increasing number of individuals are now tapping into this wealth to bolster their retirement finances.
Now an important part of financial planning for older homeowners, debt repayment, supporting loved ones financially and home improvements are just a few of the reasons that our clients are turning to equity release.
Given market volatility, it’s no surprise that more than half (54%) of the equity released in Q1 of 2023 was used to manage debt, and the largest chunk of funds released were used for mortgage repayments4.
Gifting to family or friends is also a key reason that our clients are opting to access some of the value tied up in their homes. In fact, a new study conducted by equity release lender, Standard Life, suggests that almost one in five people (19%) used some or all the proceeds for this purpose last year5.
While later-life lending volumes have increased over the years, so too has the professionalism of the market and fundamentally, the safeguards put in place for borrowers. Once the reserve of specialist advisers, it’s evident that the later life lending sector is starting to steer towards the mainstream market. Yet at times the sector is still haunted by negative misconceptions.
A quick look at lifetime mortgages
First things first – the type of equity release we offer is a lifetime mortgage, but what is that?
The term ‘lifetime mortgage’ is a relatively new term and if you spoke to someone 5 years ago, they probably wouldn’t have heard of it.
The first thing we always say is a ‘lifetime mortgage’ and ‘equity release’ are essentially the same thing. The reason for the change in name is that most of these products are very different than they used to be, so the new terminology is used by many to veer away from the outdated stigmas attached to later life lending.
In short, a lifetime mortgage is a long-term loan which could enable your clients (homeowners aged 55 and above) to release a portion of tax-free cash from their home, and still own every square inch! The loan is usually repaid from the sale of their home once your client (and their partner, for joint lifetime mortgages) pass away or need long-term care.
Misconceptions of equity release
Your clients might have heard about releasing money from their home through equity release, but what do they actually know about it? As is the case with all financial products, there are a lot of ifs, buts and uncertainties to be considered.
Here we have pulled apart the facts from the fiction, to help your clients banish those equity release myths that they may have heard. We’ve taken a look at five common concerns that your clients may have about equity release.
The myths and facts of later life lending
Myth #1: You can end up paying more than your home’s worth
There are safeguards in place to ensure that your clients never owe more than their home is worth.
As a member of the Equity Release Council and authorised by the Financial Conduct Authority, here at Fluent we offer a ‘no negative equity guarantee.’ This guarantee ensures that no matter how long interest accrues, the owed amount will never surpass the value of the property linked to the plan, protecting your client and their family from a debt burden.
Myth #2: You have to make monthly payments
With a lifetime mortgage, your client is not obligated to make monthly payments, although they do have the option to do so if they wish. Our lending partners (who are all members of the Equity Release Council), now offer new lifetime mortgage plans that permit penalty-free, optional repayments.
Typically, your client can make repayments of up to 10% of the mortgage balance annually or choose to clear the interest on a monthly basis.
If they decide not to make any payments, the interest on the borrowed amount will accumulate over time. Both the initial borrowed amount and the accrued interest will only be repaid when the home is sold, or when the last homeowner either passes away or moves into permanent long-term care.
Myth #3: You will never own your home
Taking out equity release with a lifetime mortgage allows your client to retain ownership of their home, as it doesn’t involve selling their property to the lender; rather, they’re borrowing against its value.
On the other hand, a home reversion plan, which accounts for less than 1% of the market, entails selling a portion or all of their property to a provider in exchange for a lump sum.
Unlike traditional mortgages, lifetime mortgages have no fixed end date, providing greater flexibility for older homeowners who may face limited mortgage options.
Equity release also grants your client the right to move home, thanks to the Equity Release Council’s guarantee. They can transfer their lifetime mortgage to a new home, provided it meets the lender’s criteria. If the new home has a lower value, then your client may need to repay a portion of the lifetime mortgage and potentially incur early repayment charges.
Myth #4: You cannot release equity if you have a mortgage
Owning a mortgage does not prevent your client from releasing equity from their home. In fact, utilising the property’s wealth to help pay off an existing mortgage is one of the most popular applications of a lifetime mortgage.
With a lifetime mortgage, your client will receive cash in exchange for a first charge on their property for an equivalent amount. This cash can then be used to repay the existing mortgage, all in one legal transaction. This arrangement then provides them with a lifetime term with no worries over repayment.
Customers who want to make regular monthly interest payments can select a suitable plan and set up a direct debit for this purpose. If they are unable to afford further payments, the mortgage does not default; it automatically switches to rolled-up interest.
Myth #5: Lifetime mortgages are an expensive way to borrow
It’s not unusual for a lifetime mortgage to be cheaper than a conventional mortgage, or other forms of secured borrowing. Our customers are often surprised at how cost-effective lifetime mortgages have become. With a flexible range of equity release products available, we offer a variety of lump sum and drawdown lifetime mortgage options, which could in fact reduce the cost of borrowing for your clients.
Managing Director of Fluent’s Equity Release division, Aaron Conlon, discusses the growth and modernisation of later life lending
“Whist we have, without doubt had far more positive coverage over the years, an element of negative narrative about equity release remains in mainstream media. There have been some great leaps forward in terms of educating customers in the industry, not to mention the work that the Equity Release Council is doing to banish misconceptions, but this is an ongoing job.
Here at Fluent, we want to help your clients understand the truth about the sector – the products, the features and what later life lending really means. It’s always been our view that changing customer needs and attitudes would see equity release transition from a specialist option to a mainstream option, which is what we’re now seeing. But with growing numbers of people exploring equity release, it’s arguably more important than ever to ensure potential customers are getting the right advice.
We believe that the impact of the equity release market is more significant than just the spending power it gives to our customers. People are increasingly recognising that equity release is a good product for the right purposes and can help them in getting the most of out of later life. The choice available and the flexibility offered in our industry are things that I think as many potential customers approaching their retirement should be made aware of.
He added “In spite of economic uncertainty, this past year has been marked by a record-breaking performance for our equity release division. The flexibility built into our range of products meant money previously tied up in bricks and mortar was spent across a range of sectors. In fact, last year our equity release division saw a significant increase in total lending, with a 60% increase in monthly applications written!”
Knowledge is key – Introducing Fluent’s Equity Release guides
There’s no doubt that equity release has undergone a huge amount of growth and modernisation in the last few decades – but does your client know this? Are they equipped with the up-to-date information they need?
To give your clients the tools and information they need about equity release, we’ve designed a series of new guides:
- The ins and outs of a lifetime mortgage – this guide provides information on the different types of lifetime mortgage available
- Learn about the pros & cons of equity release– this guide explains how equity release works
- Equity release: Home reversion or lifetime mortgage – this guide explains the difference between a lifetime mortgage and a home reversion plan
In this ever-changing market, now might be the time consider equity release for your clients. So if you are an adviser, and equity release doesn’t fall within your expertise, our dedicated team are on hand to help you understand what opportunities may be available for yourself and your clients.
We already work with a variety of introducers to ensure their clients walk away with the most suitable solution based on their needs. To explore your clients’ options, please don’t hesitate to get in touch with our broker team with any questions or cases that you need help with.