UK industry group the Equity Release Council (ERC) published its quarterly update recently, showing a market that has returned to growth for the first time in a year; both new customers and total lending in the market increased (10% and 8% respectively) from the second quarter of this year.
Market activity remains suppressed when compared to recent years, however. The first three quarters of 2023 have delivered three of the five lowest periods of activity since at least 2017, and the number of new plans agreed nosedived at the end of 2022 (although that has plateaued, perhaps indicating a natural floor in the market).
Still, green shoots are green shoots.
“With customers starting to venture back, the market is at the start of a gradual but fragile road to recovery, with pent-up demand likely to emerge in future years as the interest rate cycle begins to turn again,” said Equity Release Council CEO, David Burrowes, in a press release at the end of October.
Equity release market participants will undoubtedly be hoping for the interest rate cycle to turn. And those who feel that it is got some additional good news on 2nd November when the Bank of England’s monetary policy committee voted to keep interest rates on hold – for the second consecutive time after 14 consecutive increases.
Now the market has returned to growth, numerous structural tailwinds support the bullish case for that growth to continue. The UK has an ageing population which is asset rich but cash poor; a bulk annuity market that continues to grow – and that has medium to long term sustainability; and high property prices, which means that first-time buyers need to access the Bank of Mum and Dad to get a deposit for a mortgage.
The industry is also driving change. The ERC is producing an adviser summit in mid-November 2023, a first for the organisation, which is designed to educate financial advisors in the UK about the equity release market; a recent review of later life mortgage firms by British regulator the Financial Conduct Authority, whilst critical of some of the practices it identified, forced firms to make changes to their sales and advice processes and changed how they incentivise their advisers. Additionally, the country’s new Consumer Duty, which came into force on 31st July this year, holds advisers to a higher standard, which should provide consumers with added comfort and better advice.
The primary driver of activity in the market is that of necessity, which is usually either the transfer of wealth to children or grandchildren, or simply the need for cash to pay bills if the homeowner has a small pension.
But the rising interest rate environment in the past two years has curtailed equity release demand. While the homeowner doesn’t pay out interest each month, it rolls up, and higher rates means a higher bill when the home is sold – which means less for the recipients of any inheritance that might be available. And it’s uncertain for how long rates will remain elevated.
“The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures,” says the Bank of England’s Monetary Policy Summary.
Capital for the equity release market is in plentiful supply. Life insurers awash with bulk annuity premiums – the main source of funding of equity release mortgages in the UK – have plenty of money available to meet any growth in demand in the coming years. For the industry, it’s a case of continuing to educate the market to ensure that it’s best positioned for growth.
“Looking ahead, we must be wholly committed as an industry to putting equity release in its proper context as one of a range of later life lending options and putting property wealth in its proper context at the heart of every retirement planning conversation,” said Burrowes.