Dean Mirfin analyses recent market results and concludes a more positive outlook for equity release
Within the equity release sector, the measure of new business levels has been fundamentally skewed through our own volition. In real terms, lending figures fell during the economic downturn. But we can now be more positive as the latest Key Retirement Solutions Market Monitor has revealed that levels of lending are now increasing.
What has been little discussed over the past five years has been the drive within the sector towards flexible drawdown products, and the effect that this has had on the shape of the market. The latest figures reveal that 75% of new business is now drawdown, compared to just 16% for the same period in 2006.
What is the significance of this? The average facility available to drawdown customers for the first half of 2011 was £53,328, but the initial advance taken only averages £28,174. In 2006 the majority of customers would, to access maximum borrowing, take the full advance with only 16% opting for drawdown.
The change from 16% to 75% effectively means that customers in the first half of 2011 borrowed £197m less than their facility allows due to drawdown allowing them to return for the balance as and when needed. If we factor this back into the overall lending figures, the market is actually back to new business levels at more than £600m - the same as 2006.
Evidence shows that most customers with drawdown return to access most of their facility in the first two to three years, which is why it is right to factor the undrawn facility into the market figures.
Looking purely at like-for-like figures for lending and customer numbers, year-on-year the market is up 3% and 5% respectively over the first half results for 2010, which includes the further increase of drawdown.
Most regions in the UK showed increases in both plan numbers and total lending, with Scotland experiencing the highest year-on-year increase for numbers and value than any other region. The fallers were Northern Ireland, the North, North West, and Yorkshire and Humberside.
Usage reasons for the money released have remained relatively consistent. Home/garden improvement retains the top spot with 59%, followed by repaying debts (excluding mortgage) at 31%, holidays 30%, gifting to help family and friends 23% and clearing an outstanding mortgage 20%.
The average mortgage repayment is £30,838. This need is being driven by a number of factors. The first is that due to necessity, mortgages have had to be set up into retirement at a later stage in life.
Divorce is a good example where individuals have had to rebuild their finances, and have done so in many ways, including financially starting again. In addition, a DWP report released last year said that divorce rates among the over-50s have risen five-fold in the past decade.
The second factor is through endowment or investment failure. Few maturing endowments are meeting the value required to repay loans in full.
The third factor is economical, with many releasing equity to repay a mortgage which is affordable, but taking too large a share of their retirement income.
The trends identified in the latest Key Retirement Solutions report show that there is a real requirement for equity release. It also shows product innovation can influence and change both the behaviour and take-up of certain products.
The latest significant innovation has been in the form of simplified underwritten enhanced plans. The first is being launched by More2life, which offers enhanced LTVs to those with health or lifestyle impairment. The simplified underwriting of this type of product makes this much more accessible and palatable to advisers and their customers.
Considering the latest market trends, we are right to be positive about the direction of the sector. But we should not become complacent. Providers need to continue to develop their products in partnership with the distributors and their clients.
There is a great opportunity to test products and establish what innovation is needed or wanted through major distributors today. Drawdown has already shown that products can be developed which are viable for the lender and appeal to the needs of many equity release clients.
For the rest of 2011, we expect the sector to continue the trend of increased new business levels. We also expect to see a diversification in the uses of equity release - one such area being towards the funding of care in the home. The sector is now well placed to begin to realise its potential.
Dean Mirfin is director at Key Retirement Solutions
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