Equity relief for the older borrower

At an industry conference last October, the Financial Conduct Authority’s Christopher Woolard raised the problems faced by this demographic when it comes to borrowing. Tighter rules on affordability introduced in 2014, following the Mortgage Market Review, have meant that lenders will often require loans to be repaid by the age of 70 or 75. As a recent article in the FT suggests, however, part of the answer lies in equity release loans, which allow the value of a borrower’s property to be unlocked. 

At the same conference, Woolard raised the possibility of increasing the choice of products available using FCA regulation: “We believe there’s a debate to be had about what products and markets could exit and whether more entrants, more innovation in this space, might benefit consumers with greater choice and more products.”

Equity release loans currently only make up a small part of the mortgage market, but figures released by the Equity Release Council suggest that they are on the up – increasing 21% in the first quarter of 2016 compared to the same period in 2015. 

Mainstream lenders have also started offering products that are more appealing to the older borrower. Halifax and Nationwide, two of the biggest lenders, announced in May that they are extending the age limit by which a borrower must pay off a mortgage.

There are, however, noticeable differences between an equity release loan and a conventional mortgage, although, as the FT notes, few brokers are trained to advise on both.

Conventional mortgages require an assessment of a borrower’s income as well as the period of time over which it will be repaid. By contrast, an equity release loan gathers interest over the term and is paid off after the property is sold.

Cost will always be the most important factor when weighing the relative benefits of both. Mortgages typically have lower rates of interest, of around 1.3% to 2.3%, depending on the length of the term. Equity release loans on the other hand normally have an interest rate nearly double that of conventional mortgages, as well as set-up fees of up to £2,000.

As a result of these differing costs, those still in their sixties are often encouraged to take out a mortgage as opposed to an equity release loan – the longer you live the more interest you are likely to accumulate, meaning a smaller pot for the beneficiaries of your estate. 

There are, however, many advantages to an equity release loan, which explains their growing popularity. The benefit is that borrowers do not risk being forced from their home, unlike a mortgage where a failure to keep up with repayments risks repossession. In addition, there is an agreement among equity release lenders that no more than the value of the house can be owed. Further to this, the introduction of a new hybrid product, which allows interest to be repaid to reduce the overall debt, also makes this an appealing option for borrowers.

Given the increasing longevity of potential borrowers, lenders and brokers would be well-advised to take note of the potential of equity release loans and tailor their advice and products to suit this growing demographic.

Attributed to Chris Taylor, Chief Executive Officer of Titlesolv 

Titlesolv is the trading name of London & European Title Insurance Services Ltd authorised and regulated by the Financial Conduct Authority.