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UK equity release mortgages: subdued performance is no barometer for future

6th February 2006

Latest figures published by the Council of Mortgage Lenders (CML) reveal that new equity release lending advanced in 2005 was down by 13.4% on 2004. However the longer term picture looks rosier: the current regulatory structure should ensure that equity release lenders have the appropriate sales practices in place to sell these complex loans and this, in turn, will restore consumer confidence.

Moreover, gross advances in the equity release market (lifetime mortgages) declined by four times as much as the overall residential mortgage market, which according to Datamonitor estimates, fell by roughly 3% in 2005.

However, CML data also highlights that despite a subdued performance, gross lending in the equity release market grew by 3% from Q3 to Q4 2005. Moreover, the number of outstanding equity release loans grew by 25.5% to reach 105.1 million at year end 2005, representing GBP5.3 billion in balances outstanding.

The equity release market, which currently accounts for only a marginal proportion of the total UK residential mortgage market, is one of the niche sectors thought to hold significant growth potential. Indeed, many industry sources believe that the next generation of pensioners will be considering equity release as a voluntary tool for financial planning as opposed to releasing equity as a matter of necessity, due to a lack of vision and/or bad financial planning about their retirement income.

Nonetheless, the market is currently being constrained by the fact that both borrowers and lenders are adopting a more cautious approach to equity release. Indeed, on the consumers' side, there is still a way to go to restore confidence in a market which was previously beset by mis-selling scandals.

For lenders on the other hand, new mortgage regulations introduced on October 31, 2004 have made the sales process for such mortgage more complex. Indeed, as 'high risk' products, there are certain technical complexities attached to the selling of lifetime mortgages, and a lack of expertise, resources and fear of mis-selling are preventing some lenders from distributing the product in the short term.

However, over the longer term, the regulated lifetime mortgage market should help consumer confidence to grow. With people aged over 65 having more than GBP1,000 billion in unmortgaged wealth in their homes, the equity release market does indeed offer sound growth potential.

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