Average equity release rates fall to new low

Average equity release rates fall to new low

The number of product options available in the equity release market has grown significantly in the past decade to meet increasing consumer demand, according to the autumn 2017 Equity Release Market Report from the Equity Release Council. 

The number of new product options offered by members of the Council grew by 34% in the year to August 2017, with an additional 20 products coming onto the market, taking the number of product options available to 78. By contrast, just 24 product options existed in 2007, representing an increase of 225% in the past decade.

The last three years have seen a marked increase in product innovation. Between 2014 and 2016, an additional 31 new product options became available. Combined with the addition of 20 new products since 2016, a total of 51 new products have come to market since 2014.

This rapid expansion in product options comes as growth in the wider market has continued at pace. Total lending reached a record of almost £1.4bn in H1 2017, up from £0.9bn in H1 2016. If current trends continue, annual lending will reach £3bn for the first time in 2017, whereas 10 years ago annual lending was just £1.2bn.

Growth in equity release product plans:

Period Number of plans available Change in number over each period % change over each period Change in % since 2007
August 2017 78 +20 +34% +225%
August 2016 58 +31 +115% +142%
August 2014 27 +10 +59% +13%
August 2012 17 -7 -29% -29%
August 2007 24

Source: product data supplied by Key Retirement

As of August 2017, 68% of product options allow customers to make ad-hoc repayments free from early repayment charges to help reduce interest accrued over the lifetime of the loan.

Other increasingly common product features are drawdown, which allows housing wealth to be withdrawn in stages, and inheritance protection, which enables the ringfencing of a guaranteed minimum amount of housing wealth to leave to loved ones.

45% of plans also include downsizing protection, which allows customers to downsize to a smaller property and repay the loan – either voluntarily or if the new property does not fit providers’ criteria – without incurring an ERC.

One in 10 products now allows for full or partial interest payments to be made each month, which either stops or reduces interest being rolled up into the loan with no risk of the customer defaulting on their payments as they can switch to roll-up arrangements at any point.

Product features:

Product features – Autumn 2017 Number of product choices with this feature % of total product choices with this feature
Voluntary/partial repayments 52 68%
Drawdown facilities 40 52%
Inheritance guarantee 39 51%
Fixed ERC 38 49%
Downsizing protection 35 45%
Sheltered/age restricted accommodation 32 42%
Interest payments 8 10%

Source: product data supplied by Key Retirement

Average equity release rates fell again between January and July 2017, as greater competition in the market continues to apply downward pressure on pricing. A fall of 15 basis points (bps) took the average rate down to 5.30%, from 5.45%.

On an annual basis, there has been a fall of 66bps from 5.96% in July 2016. This compares favourably with other personal borrowing products. Only £5,000 personal loans have seen a larger fall in average interest rates over the same period, falling 123 bps from 9.27% to 8.04%. In the 18 months since January 2016, average equity release product rates are down 90bps, from 6.20%.

The average age of new equity release customers dropped marginally in the first half of 2017 across both drawdown plans (from 71.7 to 71.5) and lump sum plans (from 68.2 to 68.0). Both average ages remain broadly unchanged from the first figures recorded in H1 2014 when tracking began.

However, the Council says a further breakdown of customer ages indicates that an increasing number of homeowners aged 75-84 are unlocking the wealth in their homes. Between H1 2016 and H1 2017, there was notable growth in the proportion of new drawdown plans being taken out by this age bracket, rising from 23.2% to 25.1%. This trend is also reflected among customers taking out new lump sum plans: those aged 75-84 made up 13.6% in H1 2017, compared with 12.3% in H1 2016.

Nigel Waterson, chairman of the Equity Release Council, said: “The explosion in product options over the past decade is testament to the work done by the sector to meet increased consumer demand with solutions tailored to varying customer circumstances.

“Importantly, such innovation has gone hand in hand with a continued commitment to consumer protection through regulated financial advice, product safeguards and independent legal advice guaranteed by members of the Council.

“Such growth also comes at a time when the challenge of ensuring adequate financial provision for consumers in later life has never been greater. The UK’s older population continues to grow and the reality of a shift from final salary to defined contribution (DC) pensions will likely result in future retirees facing a greater savings shortfall in later life. It is therefore clear that the role of housing wealth in funding retirement will only become more important in the future.”