In recent years, the American reverse mortgage industry has been taking a closer look at similar, commensurate markets in other nations. The United Kingdom is of particular focus for American lenders and brokers seeking to find new and novel ways to present the concept of home equity release to seniors when looking at international reverse mortgage markets.
The U.K.-based Equity Release Council (ERC) recently released a report offering an update on how that market is performing in that country, and two representatives will provide an update for the American reverse mortgage industry at the upcoming National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting early next month.
The report’s bottom line appears to be centered more on market potential than actualization, as home value increases in the nation have caused a larger share of wealth to be tied up in a home’s equity rather than home-secured debt such as a traditional mortgage.
Property values, evolving away from a ‘loan of last resort’
A common descriptor that reverse mortgage professionals are used to hearing concerning the product in the United States is when it is called a “loan of last resort.” That perception is not restricted to the US, as the report indicates that certain people in the UK share that perception relating to the release and conversion of home equity into spendable cash. However, according to the report itself, market factors and increasing home price appreciation appear to be eroding that perception.
While the overall number of customers served in the first half of 2021 is “broadly consistent” with the number of customers seen the prior year, pandemic disruptions in creating new equity release arrangements returned to pre-pandemic levels. Like those seen in the United States, interest rates have remained low, and the options for equity release in the UK are high, according to David Burrowes, chairman of the ERC.
“[N]early 200 new product options were launched in the first half of this year, and there are now more than double the number of options available than was the case two years ago,” Burrowes said in the report’s foreword. “Against this backdrop, property wealth continues to evolve from having been seen as an ‘emergency fund’ in retirement to an enabler of people’s life ambitions and financial goals. The total value of UK private property is at a record high and house price rises over the last year will have also mitigated the impacts of compound interest for existing equity release customers.”
The idea of seeing equity release as an “emergency fund” is similar to the concept in the US of considering a reverse mortgage a “loan of last resort.” While UK residents are still not universally on board with the idea of equity release, other data points indicate that the concept appears to be gaining traction.
Changing trends and perceptions
According to another report released by the ERC this past summer, the perceptions about home equity and how it may play a role in retirement are shifting. While few people in the nation believe it is “acceptable” to hold a mortgage in later life, data indicates a shift is taking place, Burrowes said.
“[N]early one-third of homeowners see their mortgage as an investment in their future because they are building up an asset over time,” he said. “Two in five (40%) homeowners agree it is becoming more acceptable to have a mortgage in later life, while 57% are interested in accessing money from their property as they age.”
This emphasizes that as in the United States, equity release professionals in the U.K. and elsewhere across the world should prioritize borrower education, echoing longstanding perceptions regarding the necessity to expand education efforts seen in the American reverse mortgage industry for several years.
“This fundamental shift in perceptions means later life products, advice, policy and financial education must also keep evolving,” Burrowes writes. “This year has already been a busy one in this regard, with an increasing variety of firms seeking Council membership and new resources including the second edition of our adviser guide launched to reflect the evolution of the market.”
Even in a nation with a more robust state retirement pension system, retirement financing shortfalls can be addressed through the employment and conversion of home equity for older citizens, the report reads.
“Property wealth will remain critical to the nation’s financial wellbeing and later life security in the post-pandemic world,” Burrowes says. “It is equally crucial that a commitment to delivering good consumer outcomes through expert advice, flexible products and robust safeguards remains central to everything we do.”
Market activity and customer trends
In addition to adding home equity for people within the country, home price appreciation has had another effect for those impacted by compounding interest, the report reads.
“House price rises over the last year will have helped to balance out the impact of
compound interest for some existing equity release customers,” the report says. “With the annual rate of UK house price growth having been above 7% since January 2021, a customer paying 6% interest could have seen their property equity grow faster than their loan, while a customer paying 3% interest could have seen their equity grow more than twice as fast.”
Overall, nearly 36,000 “new and returning customers” were served by U.K. equity release products. However, the data does not break down the difference between newly-served customers and those returning to the space. The average age of equity release customers stood between 68 and 70 years of age, with the younger segment favoring “drawdown” while the older segment favored “lump sum.”
Loan-to-values (LTVs) remained stable due to home price appreciation being somewhat offset by greater draws on home equity, the report says.
Late last week, NRMLA announced that Burrowes and Steve Kyle, secretary-general of the European Pensions and Property Asset Release Group would be appearing to discuss additional findings and relevant data points from the study at the NRMLA Virtual Annual Meeting in November. Other “important marketplace trends” will also be shared with virtual attendees, according to a NRMLA member communication.
Read the report at the ERC.