An eventful 2005 reinvigorated the equity release market - the first full year of regulation saw a rate war drive down interest rates and firms diversify into new markets, reports Dean Mirfin
Nearly half of all borrowers go direct to providers for equity release products, so brokers have to try harder to explain the benefits of independent advice.
2005 was quite a year in the world of equity release. Despite the demands on the market during the first full year of regulation, it will probably be remembered as the year of interest rate battling and of innovation.
It would be unfair to reflect on 2005 without mentioning the providers that have created what can only be described as a year that was responsible for the products that helped make equity release a more attractive proposition for consumers.
Critics
At the start of 2005, three main criticisms were levelled at the equity release market. Critics said that interest rates were not competitive enough compared with other borrowing methods, that schemes were not flexible enough to allow consumers to manage the cost-effective release of funds, and that home reversion schemes were not flexible enough compared with lifetime mortgages.
However, developments throughout the year went a long way towards answering the critics. This time last year the lowest interest rate available was 6.75% annualised, yet by the end of the year it was 5.89% annualised. The significance of this fall in rates cannot be overstated.
The rate war of 2005 started when GE Life relaunched its lifetime mortgage. GE held strong throughout the year and, with a number of cuts in its rate, ended the year leading the field with the rate of 5.89%.
Drawdown
Providers who did not want to play the rate game were busying themselves behind the scenes on the issues of flexibility. Hodge Equity Release entered the drawdown market, which for considerable time had been strongly controlled by National Counties - the leader in this field well before others even contemplated the idea.
Hodge introduced a 10-year facility that proved popular but consumers and advisers were still kept wanting until Prudential threw down the gauntlet with the first open-ended drawdown product of its kind, which proposed more competitive pricing.
Hot on Prudential's heels was Just Retirement, which came to the market with a similar product but with improved pricing that, for the first time, offered consumers and advisers the level playing field they have wanted for so long. The impact was exactly what it should have been, with drawdown establishing its rightful share of the market.
The last, and maybe somewhat unnoticed, beneficial development during 2005 was in the reversion market. In September Bridgewater relaunched its reversion proposition, which should see its product offerings high on anyone's list when considering a reversion for a client.
The plans available from Bridgewater not only offer increased rates but like-for-like flexibility compared with lifetime mortgages, which has not previously been the case with many providers.
The reason the Bridgewater developments are so significant lies in the fact that advisers who do not advise on home reversions are still required under Financial Services Authority rules to consider them in deciding whether a lifetime mortgage is suitable for a client. The percentage of the market taking out home reversion plans is gradually increasing.
Overall, results for 2005 show a slight decrease in business levels compared with 2004.
Last year the average equity release customer was aged 71 and the average loan to value was 23%, slightly down from 2004 when it was 24%. This meant the average amount of equity released was £46,093 - down from £46,331 in 2004 - and the average property value was £202,344 - up from £191,935 in 2004.
Value
The value of equity release plans sold in 2005 was £1.21bn, making it the second consecutive year in which more than £1bn worth of business was written.
Across the UK, the South is still the region with the most equity release plans sold - 6,461 in 2005. However, the South West (3,443) fell from second to third place as more plans were sold in the North West (4,404).
Scotland recorded the highest annual increase in the value of equity release plans sold, with plans increasing by 53.65%. It was followed by London (22.26%) and the North West (17%). The North (-46.07%), the South West (-24.34%) and Yorkshire and Humberside (-21.48%) experienced the greatest decreases.
The end of 2005 showed strong results with a year-on-year growth over the same period of 2004. This should mean a positive market outlook for the year ahead.
However, this does not mean much more business will be coming in. Last year saw one extremely disappointing statistic that should provide the equity release industry with a focus for 2006.
In 2005, approximately 40% of Safe Home Income Plans' equity release business was generated by consumers going direct to product providers.
Only about a third of providers let clients transact business directly with them. This means two-thirds of the market is closed to 40% of borrowers.
It also indicated that more than a third of borrowers are not yet seeing the benefits of the industry's hard work to improve competitiveness and pricing of products.
It seems pointless for borrowers to arrange a plan at the highest cost. But are borrowers to blame? Perhaps advisers could do more to push their worth and get their message across.
The message for the year must, therefore, be one of education. In January the Which? report meted out some ill-deserved criticisms to the equity release market - but it also highlighted the importance of specialist independent advice.
There are many reasons advisers need to get this message across in 2006. And, on cost alone, the penalty for choosing the wrong deal cannot be overestimated.
