The wealthy are waking up to lifetime mortgages but the industry can do more
Ensuring wealth managers and IFAs understand equity release was the top answer when Council members were asked how consumers can get the right advice in a growing market. In the first of a series of articles, kindly sponsored by Pure Retirement, the Council talked to two advisers operating at the higher end of the market.
For decades now, the main audiences for equity release products have been those who were once lower earners, trying to top up their retirement incomes, or formally middle-income earners, paying for big ticket items. That could be care expenses, home improvements, helping loved ones out with a living inheritance or simply meeting living costs in later years.
However, it appears that lifetime mortgages have started to receive more attention lately from wealthier consumers. So much so, that getting the right information to those who advise higher-net worth people came top in a Council poll on what was most important to ensure consumers get the right advice as the market grows.
Historically, equity release clients nearly always approached specialist equity release brokers or providers direct. Now, though, 69% of members say that the most important factor is ensuring wealth managers and IFAs also understand what equity release is and when it is appropriate. This signals how the industry is appealing to a broader section of the market.
Commentators may speculate that this has been driven by wealthier consumers’ needs changing and the inability of other products to meet those needs.
But David Forsdyke, an associate at Knight Frank Financial, says this is not the case. Instead, he says, it is the spectre of distressed pensions income and an ageing population that are pulling a cohort of wealthier homeowners into the lifetime mortgage market.
“I believe wealthier consumers are simply meeting their needs in a different way,” says David, who has specialised in later life finance for 15 years. “We are all living longer but saving less. Research from Public Health England shows life expectancy increasing and we could see over two million over 85s in 2031. That’s just 12 years away. If we’re all living longer then we will obviously need our financial resources to last longer, especially if our health declines and we need care and support in our final years. Property wealth is slowly but surely entering the mainstream financial planning arena.”
This trend is underpinned by the mathematical realities highlighted by the Council report ‘Beyond Bricks and Mortar: the changing role of property in later life financial plans’, published last year. It showed that while 51% of those aged over 45 see property wealth figuring in their retirement planning, 72% want to continue living in their current home for as long as they can. Something has to give.
Marcus Rees, Senior Financial Planner at Romilly Financial, also says that the basic needs of the wealthy have not changed. Instead, growing interest in equity release is a result of products and rates being more attractive and transparent. “It might be argued that high net worth or asset rich clients are less likely to have a need for equity release,” he says. “However, you can have substantial pension savings and property and still need access to funds that will maintain lifestyle in retirement. We certainly see clients in our area that are asset rich but relatively cash poor in retirement. Often they want to remain in the family home for a number of years longer.”
Contributing to the deteriorating financial picture in retirement has been a decline in pension provision, with the most generous final salary pensions expected to be largely a thing of the past by 2050. This was highlighted in a second Council report this year, ‘The Pension/Property Paradox: moving beyond tunnel vision in retirement planning’. International strife has only made matters worse.
“Recent global events have forced some to tap into their pensions and savings early, and the economic impact of the coronavirus pandemic has exaggerated the problem by reducing the value of investments and pension funds,” David adds. “When you consider these factors together, it is easy to see why many wealthier, older homeowners, who will have enjoyed considerable growth in the value of their homes and other properties, will look to access the wealth in bricks and mortar to replace losses, top up their income, maintain their lifestyle, pay for their care, support their families, and improve their homes.”
David believes three main things have brought us to the point where IFAs, wealth advisers and their wealthy clients are more prone to choose equity release. The first is increased consumer protection — both FCA regulations and the Council’s own standards framework. Second, flexibility means there’s a product for everyone. The range of features and options on lifetime mortgages has exploded in the past few years, and with it the number of products on offer. This makes borrowing against capital in a home much more appealing to wealthier consumers. Finally, interest rates have fallen. The sector was once seen as expensive but increased popularity and the way funders have come to appreciate the security of their investment has increased competition and lowered rates.
Marcus credits the versatility of the products too but also points out that clear early repayment charges (ERCs) that clients can easily understand, and which are “quantifiable”, have played a big role in increased popularity among the wealthy. Marcus would like to see more fixed ERCs if lifetime mortgages are going to continue serving wealthier customers better, as well as hybrid products that allow clients to swap from more traditional mortgages to equity release products more seamlessly. In this way, product evolution can’t stand still — and living longer presents other challenges.
As consumers expect ever longer retirements, they are only too well aware that their homes are capable of gaining enormously in value before they die. They want to be assured that they aren’t getting a raw deal. This may lead to new product innovations that level the playing field with consumers who may increasingly live more than 40 years beyond the date the product is first taken out.
“If I could make one change it would be to introduce an inflationary increase to reserve facilities and the ‘income’ products currently available,” David says. “Many wealthy homeowners are asset rich but cash poor, so are using equity release to top up income or provide for the future. Having a fixed amount paid monthly for a fixed period, or having a fixed reserve amount, is not always helpful as it does not allow for inflation or property value increases.”
The overall shift towards retirement planning for the wealthy is seen as the last piece of the puzzle by some.
“Wealthy consumers represent the final pillar for the equity release industry,” says Paul Carter, CEO of lifetime mortgage provider Pure Retirement. “As use of these products spreads through their ranks, it can now safely be said that there is no category of consumer that does not turn to lifetime mortgages in a significant way. This is an important moment and a huge compliment for the industry. Rates have helped to drive this change and it is the popularity of these products that will help keep them competitive. So it’s a virtuous circle that will ensure the sector remains a key part of mainstream financial planning for retirement from now on, regardless of the size of someone’s wealth.”
However, caution is advised. David stresses how much more there is to do — a reflection perhaps of why so many members are so keen that wealth advisers and other advisers in the mortgage and later life arenas receive more education. “Say the words equity release and there is still a sharp intake of breath as many advisers and their clients remember the poor value products of the past,” he says. “I can sense the shift in the room as advisers slowly realise what the modern equity release market has to offer for their clients. We have seen a slow but steady change in attitude but there is still a long way to go.”
Please note the views of our contributors are theirs and not necessarily those of the Council.