Scots race to release equity ahead of retirement

PEOPLE in Scotland are turning in record numbers to equity release plans in an attempt to clear their debts and bolster their retirement incomes.

Paying off their mortgages, credit cards and loans is one of the biggest reasons for many retired homeowners taking out equity release plans

Sales of the product, which allows homeowners to unlock the equity in their property while continuing to live in it, are soaring despite regulatory concerns over the sector.

The equity release market is booming even as concerns grow over a lack of competition and claims that firms are failing to meet the needs of older homeowners.

Equity release most often comes in the form of a lifetime mortgage, which allows people aged 55 or over to take out a loan against their home. The loan and the interest is usually cleared with the proceeds of the eventual property sale.

While interest charges are coming down they are significantly higher than those on normal mortgages – typically ranging from around 5 to 6.5 per cent – and can compound rapidly over the term.

Demand is being driven up by a combination of factors, including low savings rates, higher pensioner debts and house price increases that have made it a more attractive option.

The market has doubled in size in just four years, the Equity Release Council revealed last Monday.

Figures published recently by Key Retirement, a specialist adviser, found that 1,854 equity release plans were taken out last year by over-55s in Scotland, up from 1,530 in 2014. More than £100 million was unlocked from properties north of the Border, a 40 per cent year-on-year lending increase.

The average equity release customer in Scotland last year was aged 71 and released £54,478 from a property worth £167,933.

Its popularity is expected to rise over the coming years as more retired homeowners reach the end of their interest-only mortgages and struggle to find new deals. Paying off mortgages, credit cards and loans is one of the biggest reasons for taking out equity release plans.

“That highlights a real need for lenders – including equity release providers – to develop solutions to help,” said Dean Mirfin, group director at Key Retirement.

“The interest-only mortgage problem steps up a considerable gear in 2016 and the market needs further innovation to meet this increased demand from those who urgently need solutions to enable them to remain in their homes.”

Confidence in the security of equity release has improved in recent years, due partly to a code of conduct set out by the ERC that includes a no-negative equity guarantee and the right for borrowers to remain in their property for life as long as it’s their main home.

Innovation has been in short supply however, while the domination of the market by a small handful of big players raises concerns over competition.

A 2013 review of the market by the Financial Services Consumer Panel highlighted poor competition and consumer choice, noting conflicts of interest among the largest providers and advisers. Confusing and changeable product terms and high and unpredictable exit penalties were also singled out in the report.

Research commissioned by the Council of Mortgage Lenders last year concluded there were still too few options available to people wanting to borrow on their housing equity.

Tracey McDermott, acting chief executive of the Financial Conduct Authority (FCA), told MPs last October that the regulator was keeping a close eye on the market. “There has been little by way of new products coming onto the market,” she said. “Equity release has an unfortunate history. We do need to think about whether the financial services industry is providing the right sort of products at the right stage of life.”

Barriers to competition in equity release are part of a wider FCA review of the mortgage market, with particular reference to the UK’s rapidly ageing population.

There are also questions as to whether firms are meeting the needs of retired homeowners, particularly in the wake of last year’s pension reforms.

Almost half of advisers polled this month by Bower Retirement Services, an equity release advice specialist, said more retirement lending solutions were needed.

Andrea Rozario, chief corporate officer at Bower, said: “The industry does need to address the opportunities being offered by expansion with further innovation and that will mean looking at retirement lending more widely than simply the products available now.”

Two-thirds of equity release loans taken out last year were drawdown lifetime mortgages, which enable borrowers to take just a small amount of their equity. Some smaller providers let the borrower pay interest each month, to prevent it from rolling up too much over time, while so-called hybrid products – a combination of lifetime and ordinary residential mortgages – have also emerged. These offer a lower rate of interest in return for reducing or removing the basic protections attached to most equity release plans.

Scott Pentleton, director at Edinburgh-based IFA Alpha Wealth, wants lenders to offer more flexibility. The ability to set a regular monthly payment, rather than a lump sum and capital advances through the term of the loan, would be especially helpful for borrowers, he said.

“This would be of interest and would mean debt accrued slower. Since the credit crunch this type of contract has been lost and I’m sure it would be great interest to those consisting equity release as a way of assisting in retirement,” said Pentleton.

All equity release plans carry risks and the arrangements can often be complex, so specialist advice is essential.