Equity release has been on my mind over the last few months – as I’ve spoken at a few sector events and have been doing some work for a lender in the sector.
For consumer finance enthusiasts (nerds) like me, it’s one of the most fascinating corners of financial services.
The combination of its chequered history, the vulnerability of its customer base, and the way it can pit generations against each other all combine to create something I find hard to take my eyes off.
Times have changed
Seasoned retail financial services professionals will remember the bad old days – when equity release was unregulated, too expensive, and could even leave relatives with a bill to pay when the borrower died. It’s night and day comparing today’s sector to those days.
The Equity Release Council (ERC), the industry’s trade body, is more committed to raising standards and building the reputation of the industry than any other comparable body. Most people I meet in the sector these days are excited by the potential for the sector, but understand that it would be all too easy to shatter the trust they are building by pushing too hard for success to come immediately.
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Treading carefully
Followers of the political scene will be familiar with the Ming vase analogy, which is popular right now. The theory goes that Labour knew they would win power if they didn’t mess things up, so they applied an overabundance of caution in everything they said and did – like carrying a priceless vase from one end of the room to the other.
The metaphor works pretty well in the equity release sector too. There is a looming problem for which equity release is likely to be a growing part of the solution: people don’t have enough saved for retirement, but many have lots of wealth locked up in their properties.
Everyone in the sector has known for years that there will be an inevitable growth in demand for their products if they just continue to behave well. While many are desperate to make the sector’s big moment come sooner, they know that any over-exuberance could result in the Ming vase being dropped and left shattered into a thousand pieces.
There is still work to do with equity release
However, the sector is not yet beyond reproach – and there are still areas where firms have work to do.
A small number of firms still offer gilt-based early repayment charges – a structure that is designed to protect the firm first and foremost, and that ends up being a lottery for the customer (not to mention just about impossible for the average person to understand).
Many still make it too hard to make early repayments – something that is all the more important in a high interest rate environment if the customer can afford it.
Rising interest rates have undeniably changed the value of equity release for many customers. Compounded interest will double the size of an equity release loan within 11 years today – compared to over 20 years before the base rate began to rise.
That makes it a much less attractive proposition for some – and reduces the amounts that lenders are willing to advance. In this environment, the ability to pay down some of the interest becomes all the more important – particularly for those who want to ensure they are leaving an inheritance for their family.
Bringing things together
At the moment, however, the market remains too siloed. For example, many equity release advisers only sell lifetime mortgages, but cannot sell retirement interest-only (RIO) ones.
If I were advising people on equity release, I would want to be able to sell them the full range of suitable options – not just a limited product set.
The other issue is that there’s not enough investment in technology in the sector to help people keep track of their balances and make repayments easily. Everything is very phone- or paper-based and there’s often unnecessary friction in parts of the process.
Providers and advisers also need to be better at flagging that customers have reached the penalty-free period of their mortgage, and helping them consider if they could save money by moving to a different product.
Finally, the elephant in the room with all equity release sales is the intergenerational conflict that it sets up.
Many families do include their children in the decision and keep them abreast of what it might mean for them. But others don’t, and it is the children who end up pursuing complaints after their parents have passed on. This doesn’t have to be a blocker to the success of the industry – but it underlines the importance of advisers working as hard as they can to get the children involved, and to have clear records of what was said and agreed.
I remain optimistic about the prospects for the sector. But there’s still room enough for them to get things wrong in a way that hampers their progress.
Hopefully, Consumer Duty is proving to be the catalyst to address the legacy issues in this sector – so that it is set up to achieve its potential.
