The Fall and Rise of the UK’s Equity Release Market
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- The UK equity release market has grown significantly, driven by demographic changes and a need for more retirement funding options.
- Equity release evolved from an unregulated product in the 1960s to a strictly regulated sector, improving consumer protection and trust.
- The market offers two main products: lifetime mortgages and home reversion plans, each with specific benefits and risks.
- Recent innovations in equity release products include more control over costs, reduced penalties, and diverse repayment options.
- The Equity Release Council plays a crucial role in maintaining industry standards and protecting borrowers, ensuring safer and more transparent equity release options.
Once a controversial product in the mortgage industry, the UK equity release market has undergone a revival in recent times.
Equity release has evolved from an unregulated product into a regulated sector worth £6.2bn in 2022, but it's important to consider the risks associated with borrowing against your property.1
Despite volatile interest rates and continued uncertainty, with consumers asking, "Is equity release a good thing?", the sector has potential for growth, although no guarantees can be made.
In This Article, You Will Discover:
At Every Investor, we’ve spent hours delving into the history of equity release so we’d be able to bring you everything you need to know as you plan for retirement.
Let’s take a look at the evolution of the UK equity release market.
What Are Equity Release Loans?
Equity release, a financial strategy that encompasses options such as equity mortgage loans, allows homeowners over 55 to unlock the value of their property without the need to move.
This method provides a pathway to access the wealth tied up in your home, offering funds for various purposes.
The money released, whether as a lump sum or in regular payments, is repaid from your estate or upon the sale of your home.
Thus, it enables you to continue living in your home while leveraging its financial value to your advantage.
What’s the History of Equity Release?
The history of equity release is somewhat chequered, with some really dodgy years in the 1970s and 1980s.
Equity release dates back to the 1960s when it was introduced to the market by Welsh banker Sir Julian Hodge.2
The original product was a simple lump sum loan with a rollup of interest on variable mortgage rates.
The early 1990s saw the dawn of bigger things for the equity release industry, with a more well-regulated market that’s continued to grow.
Pre-1992 Period (1971–1991)
Many older people were taken for a ride and lost their homes by unscrupulous lenders during the 1980s.
This was because the equity release market was unregulated, with no legislation in place to protect borrowers’ assets.
1992 to 1997
During this time, a landmark case, Equitable Life Assurance Society v Hyman3, forever changed the face of the retirement investment sector.
1997 Till Now
Legislation such as the Retirement Income Act of 2000 and the formation of the Equity Release Council Regulations 20034 helped create a more transparent industry.
An important advance that emerged was a debt cap on equity release loans.
However, the legacy of suspicion around equity release hindered growth until 2007, when the industry really started to take off.
The equity release market doubled over the five years between 2017 and 2022, from a total lending figure of £3,06bn to one of £6,2bn.5
The Equity Release Market
The equity release market has experienced growth in recent years.
This growth’s due to various factors:
- People are living longer, and pension income hasn’t kept up with the current cost of living.
- Older homeowners need money for home improvements.
- Homeowners want to access their capital to help their children buy their first home.
- The industry’s implemented stricter regulations to protect customers.
According to equity release providers, demographic changes in the UK population have been a major factor in the growing popularity of later-life mortgages.6
It's important to note that these factors may change over time, impacting the equity release market dynamics.
Traditional Equity Release Products
There are two traditional equity release products: the lifetime mortgage and the home reversion plan.
It's important to weigh up the potential risks and benefits associated with each product very carefully before making a decision.
A lifetime mortgage is available to homeowners of 55 and older against your primary property.
With this type of equity release plan, you don’t lose ownership of your home.
You also don’t have to make repayments on the mortgage or the accrued interest during your lifetime, as the mortgage is settled when your house is sold upon your death or if you go into care.
If you’ve taken a joint lifetime mortgage, it’s settled when the surviving spouse passes away or goes into care.
Home reversion plan
A home reversion plan’s an agreement where you sell a share or all of your home to a home reversion provider at lower than market value.
In return, you receive a tax-free lump sum and the right to continue living in your home rent-free or by means of a rental agreement, where the rent’s a percentage of the total amount you borrowed.
Increased Product Competition
Increased product competition’s arisen from the growing popularity of equity release as a way to access capital.
There are 3 key areas to consider when weighing up different products, namely interest rates, fees, and flexibility:
- Interest rates are subject to outside market forces to a large extent, so it’s unlikely there’ll be huge differences in what’s on offer.
- When it comes to fees, there may be a greater variation in what different lenders charge, so do your research to find out the true cost of equity release, and watch out for hidden costs.
- When comparing products, consider choosing one that best suits your individual needs and offers flexibility.
Long- & Short-Term Equity Release Trends
Long- and short-term equity release trends will be influenced by these products’ growing popularity among later-life borrowers and the need for good advice.
More people are exploring equity release options for various reasons:
- Their retirement funds are not keeping up with the cost of living.
- They want money for a big-ticket item such as a dream holiday or home improvements.
- They’d like to help their children get on to the property ladder.
As a result of these and other factors, the industry’s seen massive growth in the number of equity release deals on the market.
In 2022, the popularity of equity release reached a new milestone, with 93,421 new and returning customers using equity release products, a 23% increase from the previous year.7
This trend is expected to continue in 2023 and beyond.
The role of the advisor’s critical
Another emerging trend is the need for qualified advisors who are well-versed in the equity release market, and who can talk clients through their available options.
The Sandwich Generation’s Struggles
The struggles faced by the sandwich generation provide context for understanding the evolution of equity release.
The ‘sandwich generation’ is the age group facing the unique financial pressures associated with simultaneously taking care of their adult children and their elderly parents, making them the filling in the proverbial family sandwich.
Because of high property prices, job insecurity, and the cost of living crisis, fewer young people are able to obtain a foot on the property ladder.
- Only 24% of people between 25 and 34 own property, either with a mortgage or outright.8
- Only 34% of people between 35 and 44 own property, either with a mortgage or outright.9
On the other hand, people are living longer, so homeowners often have to bear the costs of care for elderly parents.
In 2019, 1 in 5 people between 55 and 64 was taking care of elderly parents.10
What Kind of Innovation’s the Equity Release Industry Seen?
The equity release industry‘s experienced innovation and an expansion in product options due to increasing demand.
As consumer demand increases, products such as equity release must adapt and innovate to meet those needs.
Some of the latest changes to equity release products include:
- Customers have more control over plan costs than ever before.
- Voluntary penalty-free partial repayments are now a mandatory feature of new lifetime mortgages.
- Customers can now benefit from fixed early repayment charges that diminish to 0% over the course of the loan.
In future, lump-sum products are likely to become more attractive to later-life borrowers through more competitive interest rates and tailored repayment plans.
Recent changes to equity release products have been made to address market demand, but it's essential to understand the assumptions behind these innovations and how they may impact your financial situation.
The Evolution of the Equity Release Council
The evolution of the Equity Release Council’s important to understand, as this body’s charged with protecting borrowers.
Launched in 2001, the Equity Release Council (ERC)11 was formed to keep the equity release industry accountable and to safeguard homeowners.
The ERC represents its member providers, qualified financial advisors, solicitors, and intermediaries.
The aim of the council is to maintain high standards of conduct and practice in providing and advising on equity release.
Furthermore, companies offering equity release products should have robust systems and controls in place to effectively manage risks and ensure fair outcomes for customers.
What Does the Future of Equity Release Look Like?
The future of equity release looks positive and may provide a solution for homeowners facing financial challenges during the ongoing cost-of-living crisis.
More and more eligible borrowers are likely to opt for equity release to weather the storm because these products provide the necessary financial flexibility they need.
It is, however, still important to carefully consider the potential risks and long-term implications of releasing equity from your home.
Furthermore, it’s vital to recognise that individual circumstances and market conditions may impact the benefits and risks associated with equity release.
Making the Best Financial Choice
Making the best financial choice and deciding whether equity release is the right solution for you depends on your personal circumstances.
Talking to a financial advisor will help you make sense of your options.
Other things to consider:
- Can you supplement your retirement income from sources other than equity release, e.g. taking in lodgers?
- Can you access money from your home by downsizing?
- Do you want to preserve how much your heirs will inherit?
How Did the Evolution of Equity Release Result in Products’ Being Cheaper Than Traditional Plans?
What Were the Drawbacks of Traditional Equity Release Products?
Is the Evolution of Equity Release a Good Thing for the Industry?
How Do I Make Sure My Money’s Secure Now and in the Future?
The equity release market has matured considerably since its beginnings more than 5 decades ago.
There have been some speed bumps along the way, but today the equity release market is a well-regulated, safe option.
If you’re 55 or older and need to release capital from your property for whatever reason, the evolution of equity release may just have provided the option that’ll work for you.
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