The equity release sector in the UK reached a record high of £1.61 billion in lending in 2015, a 16% increase over the previous year. Key drivers of growth include a rising number of retirees seeking to unlock housing wealth, greater consumer awareness due to major brands entering the market, and more financial advisors recommending equity release. Innovations like drawdown plans, enhanced lifetime mortgages, interest-served products, and lower interest rates have improved products and boosted demand. However, there remains a lack of understanding around the benefits of equity release, and not all who qualify for enhanced plans utilize them due to incomplete health disclosures or a lack of questions from advisors.

1. The equity release sector continues to
make strong strides, with the Equity
Release Council reporting that lending
reached a new record of £1.61 billion in
2015, a 16% increase on the previous
year. As a result, the volume of lending
has more than doubled in the last four
years, enabling it to surpass its pre-
recession peak (£1.21 billion in 2007) by
33%.
“There are a number of key growth drivers
behind this record-breaking year of lending,”
explains Stuart Wilson, Channel Marketing
Director at more 2 life. “Firstly, there are
increasing numbers of asset-rich, cash-poor
retirees in the UK who are starting to seek
out retirement lending options as they
realise their home is probably their most
valuable retirement asset. We have also
seen some big household brands enter the
market in recent years, with Legal & General
being the latest in 2015, which helps bring
greater consumer awareness of equity
release solutions. We are also seeing
increasing numbers of advisers enter the
market, especially mortgage brokers who
see opportunities to help existing, older
clients with interest-only mortgages make
the transition into retirement and repay their
existing mortgage debt.”
Ever-evolving products
While demographic and economic trends
have undoubtedly helped to boost demand
for equity release, innovation in the sector
has also played a role. Indeed, one of the
most impressive characteristics of the equity
release market has been the extent to which
innovation has enabled the products to
evolve. Flexible options such as drawdown
facilities and the ability to service debt,
combined with the Equity Release Council’s
rigorous Standards governing the provision
of advice and products, have transformed
the equity release market and ensured that
today’s products are a world away from the
offerings that tarnished the reputation of the
sector in the 1980s.
“Innovation is a crucial part of the
development of this market,” says Stuart
Wilson. “Most recently we have seen the
introduction of enhanced lifetime mortgages,
interest-served solutions and new product
features like partial repayment options that
can help clients manage their lifetime
mortgage debt. These new products and
product features give clients more options
and more control over their retirement
lending solution which in turn boosts
confidence in the product solutions.”
Lack of understanding
However, if the equity release sector is going
to fulfil its undoubted potential, then the
creative thinking that has helped to
transform the products must also be
extended to finding better ways of improving
the understanding of the benefits and
features of equity release.
“The inherent flexibility of the modern
lifetime mortgage usually comes as a
surprise to clients and financial advisers
alike, so while it is true that the vastly
improved plans are well received, we still
have a lack of understanding to tackle,”
Embracing
new ideas
Investment Life & Pensions Moneyfacts
®
10 March 2016
Equity Release
Richard
Eagling looks
at some of
the key
innovations in
the equity release
market that advisers
will need to grasp if
the sector is to
continue its recent
surge in sales

2. argues Simon Chalk, equity release expert at
Age Partnership. “When we do manage to
get across our message to advisers that
these plans offer good value for money and
a wealth of flexible options nowadays, the
realisation that they should be discussing
equity release with their clients happens.”
So what are the most innovative features
and options that advisers need to grasp?
Drawdown plans
Arguably the single most important and
popular equity release innovation in recent
times has been the introduction of
drawdown plans, which allow the borrower
to draw down regular or ad hoc amounts up
to an agreed limit. By withdrawing their
housing wealth in stages as and when they
need it, clients do not incur interest on funds
they aren’t using.
The extent to which drawdown plans are the
driving force behind the surge in new equity
release business is shown in the latest
Equity Release Council figures. These show
that lending via drawdown products totalled
£271 million in Q4 2015, its largest quarterly
total since the option was introduced in
2004. Drawdown lending for 2015 as a
whole was also the highest on record
standing at £961 million, and accounted for
two-thirds of new plans agreed during the
year. Not surprisingly given their popularity,
two-thirds of equity release providers now
offer at least one drawdown plan.
“While drawdown plans are not exactly a
recent development, lenders have upped the
ante with sizeable cash reserves, accessible
from low amounts of typically £1,000 -
£2,000 per withdrawal and often without
restrictions on how frequently sums can be
taken,” adds Simon Chalk. “They are
fantastic for those needing regular modest
amounts to supplement pension income, or
to pay for care at home.”
Enhanced lifetime mortgages
Another significant innovation in the equity
release market in recent years has been the
emergence of enhanced lifetime mortgages
offering higher loan-to-values (LTVs) for
clients with medical conditions or lifestyles
affecting their life expectancy.
“Enhanced lifetime mortgages opened up a
new market with larger sums coming to the
rescue of interest-only mortgage borrowers,
stuck without a repayment plan since the
banking crisis closed down their normal
routes,” argues Simon Chalk. “They are very
useful for funding the premium of an
Immediate Needs Annuity (Care Fees Plan)
for older clients receiving care at home, or
perhaps in residential care where their
partner remains at home. They have also
caused the slow death of the home
reversion plan, which will be sadly missed in
many ways, but will at least avoid the
unhelpful confusion people often had
between the two very different types of
plan.”
11March 2016
Investment Life & Pensions Moneyfacts
®
ilp
Figure 1: Are advisers and their clients seeing the ‘bigger picture’ when it comes to discussing and
disclosing health issues? (Source: more 2 life)
* more 2 life estimate based on Age UK Later Life in the UK, Department of Health National Diet and Nutrition Survey and ONS population data
** based on more 2 life new business data and market analysis. Source: Based on research with 100 financial intermediaries, November 2015
While drawdown plans have been a clear
success story since they were introduced,
the take-up and awareness of enhanced
lifetime mortgages has been much lower.
Indeed, there is a big gap between the
number of customers who could qualify for
an enhanced equity release product and
those that actually end up with one (see
Figure 1). “This is a particular concern for
us,” says Stuart Wilson. “Based on research
we have conducted recently, we have found
that 75% of people aged 65+ in the UK
could qualify for some level of medical
enhancement on their lifetime mortgage.
Unfortunately, only about one in every six
plans sold are on enhanced terms.”
Stuart Wilson believes that there are three
key reasons for the wide gap between those
who could qualify and those who actually do
get enhanced terms. “Firstly, the client may
be offered enhanced terms but chooses a
non-enhanced plan instead, perhaps
because they want a lower interest rate.
Secondly, the client may not fully disclose
their medical background. Often they
pretend they are healthier than they actually
are or don’t realise the importance of
disclosing certain information which they
might regard as unimportant or irrelevant.
Thirdly, in some cases the adviser does not
ask the client health questions and simply
offers them a standard/healthy plan option
instead.”
It would appear that there is still much work
to be done around enhanced lifetime
mortgages and in particular ensuring that
discussing and disclosing health issues
becomes an integral part of the equity
release sales process. There is a real
concern that at some stage the FCA will cast
a closer eye over the enhanced lifetime
mortgage market in the same way that they
have in the annuity market. As a result, there
is a strong case for arguing that health and
lifestyle information should be a mandatory
part of the client fact-finding process.
“Given that an enhanced solution can
deliver an LTV of up to 55.5% - the highest
possible rate currently available on the
market - the difference this can make to a
client’s financial outcome is huge,” points
out Stuart Wilson. “We asked advisers if they
felt health questions should be a
compulsory part of a client fact-find and
85% agreed they should.”
Interest-served products
A more recent addition than both drawdown
plans and enhanced lifetime mortgages is
the interest-served lifetime mortgage. By
enabling some or all of the interest to be
repaid either monthly or voluntarily, these
products should appeal to those clients who
dislike the compounding effect of traditional
equity release plans and are keen to protect
their inheritance.

3. the oft-heard criticism that equity release is
‘expensive’ because of compound interest is
of huge benefit. When you consider that
these lenders will accept up to 10% of the
initial loan being repaid each year without
penalty (in the context of fixed rates currently
being around half that), a borrower can in
effect create their own repayment mortgage.”
The latest equity release provider to
introduce a flexible repayment option is more
2 life via its Premier Choice Plan. “This
allows clients to repay up to 10% of the
original capital each year without incurring
early repayment charges, and crucially there
is no waiting period so repayments can start
immediately if the client wishes,” explains
Stuart Wilson. “Increasingly, more and more
clients are looking to make some form of
repayments towards their retirement lending
solution.”
While a capital repayment option clearly has
its appeal, advisers should tread carefully
here. “Capital repayment is increasingly
popular, but the adviser really should make a
sense-check with the client as to the
likelihood of them ever being in a position to
make lump sum repayments,” warns Simon
Chalk. “You have to be bold enough to
challenge clients when it comes to the
flexible features inherent in lifetime
mortgages, otherwise they may opt for
everything and end up with a plan that could
cost more for features they’ll never use.”
Fixed early repayment charges
There is a feeling that in order to increase
the uptake of equity release, the market
needs to align itself more closely to the
residential mortgage market, and one area
where this appears to be happening is early
repayment charges (ERCs). In the past,
deciphering early repayment charges has
been far from straightforward with many
linked to gilts or the Bank of England base
rate, but in recent years there has been a
growing movement towards the more
simplistic approach of fixed charges.
“Fixed early repayment charges offer a
transparency which can allow for future
planning,” comments Andrea Rozario.
“Some plans have early redemption
penalties which finish after eight years, giving
an option to repay if circumstances should
change without the fear of a potentially large
penalty. Indeed, we have one plan which
includes a ‘downsizing option’. How this
works is that if the plan is being repaid from
the proceeds of selling the home,
irrespective of circumstances, the early
repayment charges taper down during the
first five years to nothing thereafter.”
The more transparent nature of fixed early
repayment charges is particularly appealing
for those clients who may be contemplating
an equity release scheme but are uncertain
as to whether they will require it over the
longer term. “Although designed to run for
the borrower’s lifetime, a couple of lenders
include very low fixed ERCs (5 - 3% of the
13March 2016
Investment Life & Pensions Moneyfacts
®
ilp
“This option mitigates the effect of
compounding interest over a long period
and gives greater flexibility to the customer,
which for many is an attractive option,”
argues Andrea Rozario, Chief Corporate
Officer at Bower Retirement Services.
Although baby boomers with existing
interest-only mortgages that are coming to
the end of their term and who have
experience of managing debt and feel
capable of doing so into their retirement
should be ideal candidates for interest-
served products, the Mortgage Market
Review (MMR), introduced in April 2014 has
inadvertently “killed off” sales of interest-
served lifetime mortgages.
Amendments to the Mortgage Conduct of
Business (MCOB) rules following the MMR
have meant that lifetime mortgage contracts
which permit, but do not require, consumers
to pay interest for a period are subject to a
provider’s affordability assessment. As a
result, it has become apparent that some
customers who would have taken out a
lifetime mortgage giving them the option to
repay interest for as long as they wished
might not now pass affordability
assessments, and may be reluctant to
subject themselves to the assessment
process or take out alternative products.
“It is certainly true that the introduction of the
MMR regulations had a negative effect on
interest-served product sales as advisers
now have to take clients through a full
affordability process even though, ultimately,
there is no compulsion to make repayments
(clients can convert to a roll-up plan if they
wish) and their home cannot be
repossessed,” argues Stuart Wilson. “This is
one of the key reasons why we saw
providers launch partial repayment options
which get around the MMR regulations by
limiting repayments to no more than 10% of
the debt each year. Because the repayments
are voluntary and not contractual, the MMR
regulations do not apply and the affordability
test is not required. It has been a great
innovation, but for clients who want a true
interest-served solution, it is not necessarily
the right answer.”
There is, however, hope that this unintended
consequence of the MMR will be resolved.
The Equity Release Council has urged the
FCA to consider a relaxation of the mortgage
affordability rules to help more lifetime
customers take up the option to make
interest repayments before switching to a
roll-up arrangement.
Capital repayment options
Borne out of the desire to circumvent the
MMR affordability rules, the option to pay off
capital (typically 10% per annum) has
become increasingly available and is
expected to become a standard feature on
equity release products before too long. “Just
two years ago only Hodge Lifetime offered
this, yet today we have five lenders that do,”
says Simon Chalk. “Being able to counter
initial loan) within their plans, meaning that in
some cases a lifetime mortgage can be
repaid early with total certainty over the cost
of doing so,” adds Simon Chalk. “These
plans wouldn’t be the natural first choice for
borrowing money on an intended short-term
basis, but with the lack of other sources for
older clients, are worthwhile considering.
Where else can someone in retirement say,
raise significant sums under an open-ended
agreement, at under 6% fixed that doesn’t
require them to make monthly repayments?”
Lower interest rates
Innovation in terms of features and options is
all very well, but if the product is deemed too
expensive then it quickly loses its appeal.
The good news is that the interest rates
payable on fixed lifetime mortgages remain
attractive, with the average rate just 6.29%.
Particularly impressive is Legal & General’s
recently launched Premier Flexible Lifetime
Mortgage, which offers an AER as low as
4.99% provided that customers borrow a
minimum of £200,000 on a property worth
more than £533,000.
“Rates are lower than they have ever been
and are now below 5% in some cases and
fixed for life,” says Andrea Rozario. “Rates
are extremely competitive, and whilst still
compounded, the rate of growth of a loan is
clearly slower.”
Potential obstacles
It is clear that the equity release market has
evolved enormously both in terms of the
variety and quality of products, but there is
still a long way to go before the industry can
claim to have addressed all the needs of
elderly homeowners looking to unlock equity.
“This market will continue to evolve to
service the needs of a potentially massive
and growing market, but there are obstacles
still to overcome,” predicts Andrea Rozario.
“Not least reputational issues and
misconceptions over how equity release
works and the safeguards in place. The FCA
along with the industry needs to review
regulation and their approach to the older
generation. Products need to continue to
develop in line with what the customer really
needs, and competition is essential so there
is greater choice and flexibility.”
In the past a lack of funding has curtailed the
development of the equity release sector, but
with fresh sources of funding beyond
annuity-backed insurers coming through, this
is no longer an immediate concern. “One of
the main constraints on the growth of this
market from the current £1.6 billion to, say,
£5 billion - £10 billion+ is the availability of
new funding, but we know there are a
number of large organisations who are
looking at equity release with a view to
funding new solutions to help open new
markets and attract even more clients to the
retirement lending market,” concludes Stuart
Wilson. “New funders have already started
arriving and we are confident more will follow
in 2016.”