“The cost of living crisis” quickly became a cliché, but for good reason. It is likely that many people will struggle to maintain their standard of living for at least the next two years.
It may not be a coincidence that earlier this year Canada Life released data that showed that 20% of capital release clients had borrowed in the first half of 2022 to meet everyday life, down from just over 18% in 2019 and after seeing dramatic declines in the years that followed.
With Nationwide showing that, even with a slowdown in growth, house prices still rose 9.5% in September – representing tens of thousands of pounds for many homeowners – Mortgage strategy went on a mission to see if current events have sparked heightened interest in the release of stocks, and if so, what brokers – and their clients – should watch out for.
“Our most recent market statistics show strong growth, but not at an unusual level compared to pre-pandemic trends,” says Jim Boyd, managing director of the Equity Release Council.
“In the first six months of the year, nearly 50,000 new or returning customers used stock release products…a 28% year-over-year increase.”
Meanwhile, StepChange Financial Solutions head Andrew Kerry said activity levels were up more than 20% from 2021, “for a mix of reasons including the cost of living crisis in will be a”.
On the lending side, LiveMore Capital managing director Leon Diamond said his firm has seen an increase in demand. He says this will ‘continue to grow as the cost of living rises and there is a growing impact on pensions due to market turmoil’.
On the question of whether equity release is a wise option in these circumstances, Kerry says: “Although for some people equity release may be an appropriate way to deal with pressure on flows cash flow resulting from the cost of living crisis, this is a long- term product and should be viewed with the future as well as the present in mind.
He says brokers should explore any expenses that can be reduced and whether debt “is driving the desire to explore equity release.”
Kerry adds, “The broker should also seek to maximize the client’s income by performing a comprehensive benefit check to ensure the client is receiving all the support to which they are entitled.
“Other considerations to encourage the client to think might include that it makes more sense to downsize, or if there are other employment options, such as returning to work if retired. .”
Revolution Finance Brokers founder Almas Uddin said that while he has noticed more interest in the stock release, “it’s not because of the cost of living crisis, but to mortgage payments, home improvements and fixing current rates to hedge against further hikes”.
He explains, “The vast majority of lenders will only lend money for a specific reason, such as home improvement, debt consolidation, or buying another home. The increased cost of living will not be considered a valid reason, as it will make you a distressed customer. »
On this theme, when asked if the recent measures taken by the Financial Conduct Authority regarding the consumer obligation will have an impact on the capital release recommendation, Uddin replied: “No, because the loans are still based on affordability, while consumer obligation principles aim to improve communication and consumer support, as well as better value for money products.
Diamond says, “The new obligations should cause companies to consider all options for customers. In particular, interest served options and affordability should always be considered before embarking on the equity release path. So, for example, when people need to free up capital, a long-term interest-only mortgage where they pay the interest every month can cost a lot less in the long run.
He continues: “Recent work by the FCA and its panel of practitioners has highlighted that companies often encourage older people to take out a capital-released loan without considering all other options.
“Put compensation bias into the mix, as equity release pays eight times more commission than other mortgages, and it’s clear this will be an area that will attract further scrutiny.”
Just Mortgages National Operations Manager, John Phillips, comments: “Especially at times like these, brokers have a duty to ensure that they fully understand the demands and needs of their clients. In a cost of living crisis with interest rates going only in one direction, businesses must also recognize whether consumers fall into the “vulnerable” category and actively monitor any characteristics or extent of damage. potential and coercion. »
Speaking of broader risks, while Boyd says the “no negative equity” guarantee protects borrowers, and lenders “have strong plans to adapt to unique scenarios every 200 years, such as real estate prices falling significantly and never recovering,” Diamond believes falling real estate prices could reduce product LTVs.
He also says that, if prices fall, “there is a risk that future drawdown requests will not be met by the equity release provider”, adding: “This has been a concern in the market as we believe that some customers may believe this is a guaranteed drawdown and can rely on these additional funds.
Kerry concludes, “New capital release clients will need to better understand the impact of compound interest which, coupled with stagnating or declining real estate values, will erode their home equity meaning that their aspirations and long-term plans may be affected, particularly such as inheritance plans.