Q: Has equity release become mainstream?
A: To an extent. I’ve been in the intermediary market for 10 years at various providers and I’ve seen it become a lot more mainstream than ever. One of the main drivers is the historically low interest rate environment within the market. Going back 5-10 years, equity release was probably seen as an option of last resort and that was often driven by a rate being 6-8%, even higher sometimes. But at points last year there were interest rates in the market of 2.5%, fixed for life with no repayments to be made. So it’s becoming a lot more feasible for advisers to look at equity release as an option for clients.
Q: How has the purpose of the loan changed over the time?
A: Historically, equity release would be seen as a tool to repay an existing mortgage and, to an extent, it still is the biggest reason; it makes up about 36% of our book. But what we’ve seen is a dramatic change in other areas. Using equity release to purchase a property is a relatively new concept to a lot of people, but that’s been rising within our book.
Probably the single biggest increase in popularity for equity release that we’ve seen within the last two to three years is using equity release to gift funds – another part of the Bank of Mum and Dad. We’ve seen a dramatic increase in using your own property to help get your kids onto the property ladder or to gift for various reasons; within the last three years, that’s gone from 8%-16% of our book. It’s also attracting a lot more high value properties, where the clients are not struggling for money and don’t need to remortgage. Some wealth managers are looking at this as an IHT planning tool, to reduce your estate and gift away to your children.
We’re also seeing clients gifting funds from their own property to their children to buy a property. The children then service the interest on the equity and start making repayments.
Q: How competitive is the marketplace in terms of products?
A: Going back to the beginning of the 2020 there were over 400 different types of plans available. Now, that doesn’t sound that dramatic if you compare it to residential lending, but that was an increase in plans of around 150 within a year.
The competitiveness is absolutely there in terms of products, but also in how we price. For example, during a typical year at LV= we would make around 16 changes per year; but in 2019 we exceeded 50 different price changes.
Q: As an equity release provider, do you feel competition from the Retirement Interest Only side of later life lending?
A: They are obviously pretty new to the market and I think they’ve probably got a bit of a way to go, with two things which could possibly hold them back. Our view of RIOs is that there is no security of tenure for customers, while many applications are non-starters based on the affordability and stress testing that has to be done.
That said, the potential from the interest-only market is huge. There are around 70,000 a year maturing over the next 20 years; so what are those clients’ exit strategies? There doesn’t seem to be a huge number of them who have the funds to be able to redeem those interest-only mortgages. So short of downsizing, equity release and RIOs need to be looked at.
In fact, this has led in part to equity release plans becoming more flexible, because typically an interest- only residential client is younger, is likely still working, or does have the means to be able to keep servicing the interest. It led to innovation within the equity release space – now we are allowing for repayments to be made.
Q: Technology wise, what’s the equity release market like in comparison to the residential mortgage market?
A: It’s behind the innovation curve if you compare it to residential lending. An example of that would be the ability for advisers to quote and submit applications themselves online. The extraordinary situation we find ourselves in now in relation to Covid-19 has sadly delayed the launch of our online quote and apply platform.
The breakthrough period for the equity release market was between 2017 and 2018. In 2017, there was around £3bn in overall lending. 2018 saw £4bn written. That prompted providers to better support advisers by offering an online service and get away from being so paper-based and too manual.
Such systems have only been rolled out by providers over the past couple of years, but things are going in the right direction.
Q: How important is the equity release market to LV=?
A: It’s a pivotal part of the LV= business. We’re obviously seen to be one of the big players in the market and rightly so. The service that we provide and the brand speak for themselves. We design products and processes with the customer at the central core of our thought process.