The Equity Release Market
The “modern” Equity Release market in the UK started in 1965 when Home Reversions Ltd (now Hodge Lifetime) launched the first reversion scheme. A number of other providers were active in the market through the 1960s, 70s and 80s with “mortgage and annuity” schemes, or “Home Income Plans” available from 1972. There is a general awareness that there have been issues with “early” equity release schemes, but it is important to note that these earliest schemes were not the culprits – indeed, throughout this period there have been no issues with sound products securely distributed.
The products which caused the scandals that tarnish the market’s history weren’t introduced until the late 1980s. These schemes used a variable rate mortgage on the customer’s property to raise cash which was invested in an equity linked investment bond. The idea was that the yield on the bond was greater than the interest on the loan, and the customer would take the difference as an income. At the end of the 1980s, interest rates rose to 15%, the stock market crashed and property values fell.
Many customers were left with uncovered mortgages in arrears, and in some cases their properties were repossessed. In 1990 these schemes disappeared after they were outlawed by the regulatory bodies LAUTRO and FIMBRA.
SHIP was launched in 1991 to promote safe plans and to safeguard the interests of consumers. Central to this approach was the proviso that SHIP members offer fixed or capped interest rates and crucially a guarantee that the amount owed by the customer can never be higher than the value of the house commonly referred to as the No Negative Equity Guarantee.
In 2004, lifetime mortgages became a regulated product under the Financial Services Authority (FSA) followed by home reversions in 2007. This has created consistency in the provision of equity release advice that in turn has generated a lot of reassurance among consumers.
According to the returns from SHIP members, sales of equity release grew by almost 5% to £1.2bn in 2007. Sales have more than doubled since 2000 driven by a strong performance from lifetime mortgages and the regulation of home reversions has created a level playing field.
Although the equity release market remains immature, product innovation has been increasing. A key development has been the introduction of Drawdown mortgages.
These products allow customers to access their funds as and when they need it, though the flexibility of this feature varies by lender. The main advantage is that customers can reduce the effect of compound interest by taking out smaller amounts of money at different periods rather than accessing a single, larger lump sum. Some of these products also offer a regular income option. Drawdown mortgages have now overtaken lump sum in terms of sales.
Another development has been the provision of an equity guarantee or protected equity feature. This allows the customer to ring-fence a proportion of the property value thereby guaranteeing an inheritance for beneficiaries. Such a feature mitigates a key barrier to entry for some consumers concerned to ensure they have the ability to leave an inheritance.
Some reversion providers also offer early vacancy guarantees and house price inflation guarantees which can help to mitigate concerns from customers.
Product innovation is central to attracting more consumers to equity release and SHIP members are working hard to develop new products that meet customer needs.