The credit crunch is undoubtedly having a huge effect on the financial services industry. However, it also marks a huge opportunity for equity release says Jayne Almond
The crisis currently affecting the sub-prime mortgage market is likely to have far-reaching consequences in a range of sectors. Interest rates for many borrowers have already increased. Property prices in many areas have fallen. While the repercussions of the credit squeeze are likely to carry on for some time, we should explore the potential implications the current crisis has for the equity release market.
The crisis in the sub-prime mortgage market is likely to have wider implications for other equity release providers as they seek to increase rates to widen margins, cover the cost of risk and compensate for reduced margins in other sectors of their portfolio. The twin effect of pressure elsewhere in their book and concerns about liquidity means that even though long term SWAP rates have in practice reduced in the last few months, some providers may look to increase or at least maintain prices. Some providers may also start to become more conservative in the LTVs they offer older homeowners.
The rate of increase in prices and tightening of lending criteria is not likely however to be as severe as in many other sectors, precisely because equity release plans are designed to be long term and long term rates have been less affected.
While rates on equity release plans are likely to increase, they are unlikely to increase as much as other types of mortgages. As a result, equity release will become relatively cheaper and therefore more attractive to customers. With lifetime mortgage rates currently at 6-7% annualised, these now compare favourably with many conventional or sub-prime mortgages, let alone unsecured lending or credit card interest rates which can have interest rates in excess of 30% pa.
Importantly, equity release loans are offered by providers based purely on the security of the home rather than on the individual homeowner's ability to repay interest. As a result, homeowners do not need to supply any information about their income in order to qualify for an equity release. The sole requirements are that the homeowner owns the property, the property has building's insurance and that the homeowner is aged over 55. For some homeowners, such as the self employed, those with CCJs or those with perhaps uncertain income, equity release therefore offers an attractive alternative to sub-prime mortgage lending.
Increasing interest rates may also encourage a number of homeowners who are struggling to meet increased monthly repayments to convert from either a conventional mortgage, sub-prime mortgage or other forms of higher priced credit into a lifetime mortgage. Consequently instead of struggling to meet increased monthly repayments, homeowners, taking either a lifetime mortgage or a reversionary plan, can eliminate monthly cash repayments altogether.
In addition, equity release plans have the advantage of offering a no negative equity guarantee and a guarantee that the homeowner can stay in their home until they die or move into long term. Their home is not at risk as it is with a conventional mortgage, where failure to maintain monthly mortgage payments can result in repossession.
As pressure is felt from the sub-prime market, advisers may need to find alternative sources of revenue. Equity release is an area where many advisers have not yet entered the market, partly as a result of the relative size of the market (the market overall is only worth £1.3billion - a tiny fraction of the overall mortgage market) and partly as a result of the concerns about mis-selling to vulnerable pensioners.
However, equity release is now safer and more attractive to older homeowners than a conventional mortgage. The products are well-priced and are regulated by the FSA. As a result, particularly in the current crisis with rising interest rates and declining house prices, homeowners might be better advised to consider taking out an equity release loan rather than other forms of more expensive financing.
Advisers can earn attractive payments for advising on equity release loans, receiving both a commission from the provider and an advice fee from the client.
The current market can be seen in one of two ways - either as a huge threat or as a huge opportunity. While the whole market is likely to suffer some dislocation as a result of the fall out from the crisis in the sub-prime mortgage market, this is a great opportunity for homeowners and advisers to take advantage of the equity release.
Regular reminders and updates
9 December 2019 deadline
Joe McDonnell joins as head of portfolio solutions (EMEA)
Adviser of the Year - South East
Fidelity Multi Asset CIO's outlook