Many people within the Equity Release industry have been discussing the necessity for product innovation to drive the sector further forward, and recent comments from the Equity Release Council (ERC) should certainly help on this front. There has been much press coverage already this year regarding the healthy state of the Equity Release market on the back of record lending in 2015, but it is important to build on increasing consumer confidence by adding to the flexibility of products available.
On this note, I was most encouraged to read about Nigel Waterson – chairman of the ERC – urging the FCA to review its attitude towards affordability criteria so that a greater number of Equity Release borrowers would be able to make interest payments.
Those Equity Release providers offering products with the option to make regular interest payments must currently ask applicants to undergo a rigorous affordability check. This obviously deters some people from applying, whilst many who do are deemed to have insufficient income to proceed.
The ERC has argued that these rules were originally designed for standard residential mortgages, and that lifetime mortgages should be treated differently because should the borrower no longer wish to maintain the monthly interest payments, then the loan would switch to a roll-up arrangement. Furthermore, the ‘no negative equity guarantee’ ensures that customers don’t face the risk of losing their home as a result of failing to make interest payments.
Not only could changes to this area encourage more borrowers to consider equity release as an option, but it is likely that new product providers would be attracted to the industry. This could offer a real opportunity to steal a march on the mainstream mortgage market, which is struggling to find solutions to the ‘interest-only timebomb’.
In addition to lobbying the FCA regarding the interest-only issue, Nigel Waterson recently mentioned the ERC’s involvement in something more radical – namely, the potential availability of products without a ‘no negative equity guarantee’. Such security has long been a cornerstone of Equity Release lending and the vast majority of borrowers rightly take great comfort in this feature. But what if a client has other assets and prefers not to have the price for a ‘no negative equity guarantee’ built into the product? This really boils down to how far the ERC is prepared to take product innovation and we seem set for interesting times ahead.