The profile of customers using equity release is changing due to the ongoing market developments and economic factors, Key chief executive Will Hale reveals speaking to Mortgage Strategy.
With higher product rates and more restricted product ranges, Hale explains that almost 80% of new customers inquiring about equity release products are “needs-based customers”.
He comments: “Customers are really starting to feel the pinch of the cost-of-living crisis. Older customers are even more impacted because fuel and food take up a greater percentage of their income.”
Hale suggests that needs-based customers will “dominate” the market going forward.
“The average case size will come down as slightly higher net worth customers dominate but we’ll see more case units come through. Hopefully, more customers recognise that this is an option that can help soften the blow with some of these economic factors coming through,” he adds.
Earlier this month, Key Later Life Finance revealed that new equity release lending hit £1.5bn in the third quarter with the average customer borrowing more than £114,000.
Plan sales lifted by 29% to 13,341 in the three months to the end of September compared with the same period last year.
When asked about the negative reputation that hovers over equity release, Hale says looking back 15 to 20 years ago the criticism was “fairly valid when looking at the nature of the products and some of the advice practices that were prevalent at that time”.
However, he explains the “market has evolved so much in the last 10 years with the type of products available in terms of the flexibility such as the ability to service interest, make capital repayments and fixed early repayment charges so people know when they can repay the loan without any penalties”.
Hale says that while “we shouldn’t lose sight of the past […] we have moved on so much as a sector and it’s time to actually get on the front foot and talk positively about what great outcomes these products can deliver”.
At the end of Q3, there were 582 equity release products on the market with all new products offering penalty-free ad hoc capital repayments, 65% including downsizing protection and 63% allowing customers to serve interest, Key data reveals.
Meanwhile, Hale also suggests that the advice community has also evolved with the number of advisors operating in the sector increasing, which has helped make it “mainstream”.
“There are spheres of vision, so while advisors are including equity release, they’re also speaking about alternatives such as downsizing or other mortgages. This is allowing customers to move forward with much more confidence knowing that all factors have been considered – and if equity release is right for them, they move forward with it,” he adds.
With various changes in the market, alongside economic factors, current equity release product rates are starting at around 6%, which Hale notes has “gone up considerably” from the products available 12 to 18 months ago.
While Hale was “reluctant to make categoric statements” on which borrowers should avoid equity release, he warned of those taking out products at a younger age of 55 because the “impact of compound interest over a long period of time can be significant”.
He comments: “Doing this can erode the equity left in your home and therefore, the financial flexibility you’ve got in later life.”
“If you’re taking out equity release at the age of 55, you absolutely need to be thinking about servicing the interest or repaying capital in order to mitigate the impacts of that compound interest or thinking about other options at that age, more crucially around downsizing.”
In addition, customers who are taking out equity release for discretionary reasons “need to be very careful”.
“If they are taking out equity release to fund a holiday now with rates of 6% plus, it is probably a different decision than it was when rates were sort of 3% or even sub 3%.”
“Again, the cost of that decision and the implications of that decision can be far-reaching if advisors don’t think about providers and customers don’t think about that.”
Hale also highlights that vulnerability is “key”.
“Customers and advisors need to be very cognisant that if customers are feeling under financial pressure, then there’s a risk they’re taking decisions for the short term and not thinking about longer-term implications.”
Although the equity release market is growing in maturity, Hale says there is low awareness of equity release for both end customers and intermediaries.
Hale suggests there “needs to be more education” and while companies such as Key are providing that, he calls on “more firms and bigger brands” to do the same.
“There is also a responsibility around the networks, mortgage clubs and all of those types of entities to try and get the education into intermediaries, irrespective of their advising or not, if you’re a wealth manager or your mortgage broker, dealing with older customers you need to be aware of what products are available in this space,” he adds.
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