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Lenders in wait-and-see mode on UK equity release market

15th May 2006
By BBR Staff Writer

UK lenders' precautionary approach to equity release is preventing the market from fulfilling its full potential. This niche sector has the potential to treble its size within the next five years, but in spite of this obvious attractiveness, mainstream lenders have been slow to seize the opportunity.

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After growing significantly over a small base, gross advances in the equity release mortgage market stalled in 2005. New lending fell slightly from GBP1,192 million in 2004 to GBP1,104 million in 2005, constrained by factors such as uncertainty in the housing market, fears of mis-selling scandals and a lack of qualified advisors.

However, recent data released from Safe Home Income Plans pinpoints that the equity release mortgage market is picking up again with gross advances amounting to GBP279 million in Q1 2006 as opposed to GBP251.4 million in Q1 2005. This niche mortgage sector has the potential to treble its actual market size to reach GBP2.9 billion in 2010, growing at a compound annual growth rate of almost 25%.

Property boost for retirement

Datamonitor estimates that the current population of 50-60 year olds holds GBP542.6 billion of home equity and forecasts that by the time the whole sample group is of retirement age, total home equity will be GBP1,425.4 billion.

Not only have homeowners aged between 50 and 60 year accumulated significant home equity but they are also willing to use their property as a source of retirement income. Their attitudes towards leaving inheritance to their children are changing too. While one of the main barriers to older customers using the money tied up in their properties could be a feeling of guilt that the inheritance for children would be reduced, many parents today feel less of a cultural imperative to pass on their wealth.

A recent study on the equity release mortgage market, conducted on behalf of the Scottish Widow Bank among a sample of 1,472 respondents aged between 55 and 75, highlights that while inheritance remains an important barrier for 37% of respondents, 35% of interviewees stated that they would leave nothing to their children.

'There is now more willingness among consumers to consider using property to boost retirement income due to factors such as inadequate savings and pension shortfalls. While this is a positive development for equity release mortgage market, the industry needs to ensure that consumers are getting the best quality of advice possible before making a decision. At the moment, this is an issue.

Mainstream lenders yet to enter market

With a change in consumer behavior towards inheritance and an increased willingness in using property to boost retirement income, the equity release mortgage market holds a significant growth potential. However, up until now, the long awaited entrance of major mainstream lenders has yet to materialize.

While the higher lending risk, lack of experience and the high level of investment involved in offering equity release schemes may be putting off mainstream lenders, it would seem that they are simply waiting for the equity release mortgage market to take off.

Indeed, interviews carried out by Datamonitor within the industry suggest that given the relatively high level of effort and risks involved in offering equity release schemes and the current small size of the sector, mainstream lenders are apparently waiting for the market to pick up before investing resources.

'Consumer attitude towards inheritance and using home equity to fund retirement income is changing. This positions the equity release mortgage market as a sector with great growth potential and one where many lenders would want to be. By waiting too long, these lenders may face the risk of missing the boat.
'End Intelliext

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