No one wants to see their standard of living plummet in retirement, but increased life expectancy and significant cost of living increases mean that many current and future retirees face living out their lives in diminished financial circumstances. We look at the how UK equity release providers are focusing on innovation to meet changing customer needs while also satisfying the imperatives of the Consumer Duty.
While some retirees will benefit from the longevity and/or inflation protection of a defined benefit (DB) pension, and others may have an annuity to protect against one or both of these risks, they are in a fortunate minority. However, there are many individuals in the ’not so fortunate’ category who are income-poor but asset-rich and could enjoy an improved standard of living by unlocking the value that has built up in their home over the past 30 years.
Across the UK, almost three-quarters of people over age 65 own their home outright, and the over the past 30 years average UK house prices have increased by 511% from £56,305 to £287,924.1,2 However, just 8% of over 65’s are still actively earning an income in the labour market, according to British Social Attitudes (BSA) 2021 data.3
For many of the 9.6 million people who are members of a DB pension scheme and rely on it for a substantial portion of their expected retirement income, downsizing is not a desirable option: obstacles include a lack of suitable smaller properties, the high transaction costs involved with moving house, and an emotional attachment to their existing home.4
The equity release market has been undergoing an evolution in recent years, however. As customers demand greater flexibility and stricter consumer protection regulations come into force, providers in the space are beginning to innovate their product offerings to align with these new demands. How can they ensure they prudently keep pace with and capitalise upon market needs within this evolving landscape?
EQUITY RELEASE PLANS: BENEFITS AND PERCEIVED DRAWBACKS
Equity release products are an opportunity for asset-rich, income-constrained homeowners to rap into the value of their home: for instance, to fund home improvements (53%), supplement their income (23%) and consolidate debts (21%).5
The two equity release products currently available in the UK market are Lifetime Mortgages and Home Reversion Plans.
Lifetime Mortgages allow the homeowner to borrow against their property’s value and repay the loan when it is sold – typically upon death or when moving into long-term care – or via mandatory regular payments. This loan can be paid to the customer tax-free in either a single lump sum or via individual payments of varying amounts as and when required.
Home Reversion Plans involve the homeowner selling a portion of their home (typically between 25% - 100%) in exchange for a lump sum or regular payments, while retaining the right to live in the property. However, this form of equity release is less popular, as it means homeowners are selling some or all of their home at less than market value, leaving them unable to benefit from future house price rises, as well as reducing their estate that they intend to leave to loved ones as inheritance.
Historically, equity release plans have carried something of a stigma and attracted considerable bad press. Whilst reputable providers offer a No-Negative Equity Guarantee, traditional lifetime mortgages offered by the remainder of the market have faced criticism due to the compounding interest that accumulates over the loan period, leaving customers with substantial debt at the end.
The complexity and lack of flexibility inherent in this product means the Financial Conduct Authority requires customers to seek advice when releasing equity from their homes. Homeowners can still face significant challenges with such products, however. Inadequate information gathering on the part of some providers can lead to delays or rejection of applications, especially if existing debts or property values are not rigorously evaluated.
Regulatory oversight issues arise when providers are not regulated by the FCA, risking insufficient consumer protection, unresolved disputes, and poor advice on inheritance and state benefits. High-interest contracts may lead to unexpected debt accumulation, potentially exceeding property value and burdening heirs. Equity release can also complicate inheritance plans by reducing the estate available to beneficiaries, affecting their ability to inherit intended assets or properties.
An ageing population, rising property values, and insufficient pensions mean that equity release is now an essential component of retirement planning for both homeowners and providers alike, with the market having more than doubled since 2017.6 In Q1 2024 more than 14,000 UK homeowners made use of an equity release product.7
The FCA and Equity Release Council (ERC) have recently been advocating for more flexible payment structures and alternative approaches to equity release – and lenders have been listening. New features include a percentage of the property equity that can be protected for inheritance or care. The landscape is now much more diversified: in 2017, there were just 17 equity release products on the market, compared to over 200 today.8
HEADWINDS GIVING IMPETUS TO INNOVATION
The issues cited above, coupled with the advent of the Consumer Duty regulation, mean providers are reassessing equity release offerings through a product innovation lens in order to meet customers’ increasingly diverse needs and expectations.
The introduction of mandatory payment products and payment term lifetime mortgages helped to boost market growth by 4% in Q1 2024, offering homeowners greater flexibility when releasing equity to meet their retirement needs whilst also reducing the cost of borrowing.9 Interest rate volatility has significantly influenced customer decisions, giving rise to a demand for flexible products like drawdown lifetime mortgages.
A significant shift towards drawdown mortgages (56%) has left providers managing changing and increasingly complex customer needs.10 This is in part due to the emergence of a younger retiree demographic and a shift from lump sum to regular payment products. These younger retirees have a significantly different borrowing profile to borrowers 10 years ago and are considered to be a lot savvier when it comes to their finances.
More than 70% of financial services firms surveyed confirmed that they consider technological advancements to boost their investments in digitisation, automation, and generative AI (GenAI) as their top investment priority.11 The UK government, supported by the FCA, recently unveiled a comprehensive white paper on artificial intelligence with a view to fostering innovation while ensuring the safe and responsible use of AI technologies.
Equity release providers should accordingly consider their own plans to embrace such technology advancements to drive their product innovation. Automation of risk management processes can assist with mitigating borrower defaults and flags property devaluation, while GenAI promises to enhance decision-making processes. One-stop shop digital platforms and investments in third-party risk management solutions can also empower lenders to offer homeowners more personalised and innovative products.
These technologies also offer homeowners the opportunity to manage their own drawdown and payment arrangements to better meet their financial needs and potentially optimise their total interest costs. For example, several providers have recently launched flexible payment term lifetime mortgages, allowing customers to access a higher LTV (Loan to Value) than usual, with the intention of bridging the gap between traditional and retirement interest-only mortgages.12
This reflects the push to innovate by prioritising flexibility for customers – both by allowing them to make ad hoc, full or partial interest payments (in contrast to the compounding effect of traditional lifetime mortgages) and by offering them more choice in what they can borrow and enhancing retirees’ advised financial planning experience. Providers may decide to vary their charging structure on giving advice, depending on the complexity profile of the customer and how much flexibility will be required for their retirement needs via equity release products.
IMPACT OF CONSUMER DUTY
The Consumer Duty is transforming the UK equity release market with higher standards for consumer protection, with providers required to ensure good outcomes, fair value, and clear communication with customers. The FCA has urged firms to innovate and focus on quality and fairness, embedding consumer-centric values in their products and services.
Equity release products must offer genuine value with transparent pricing and clear explanations of costs. Robust after-sales support, including fraud protection and tailored advice for vulnerable customers, is essential. This initiative aims to make the equity release market safer and more customer focused.
Firms must tailor their offerings to satisfy diverse customer needs, with a particular focus on vulnerable individuals, and establish robust data governance. Key risks include non-compliance, operational challenges, and customer dissatisfaction, but by adhering to regulations and improving service quality, companies can boost their reputation and customer satisfaction.
CONCLUSION
The UK equity release market offers insurers significant opportunities for growth and revenue.
However, providers in the UK equity release space must navigate several key risks to ensure financial stability and customer trust.
Navigating the evolving equity release market demands expertise in regulatory compliance and customer needs. At Capco, we help providers develop innovative, compliant, and customer-centric solutions, ensuring firms meet standards such as the FCA’s Consumer Duty while staying competitive. Our tailored insights streamline operations, manage risks, and enhance customer engagement through flexible, personalised products. Partner with us to unlock market opportunities and deliver optimal outcomes for your customers.
Contact us to learn how we can support your long-term success.
References
1 ONS, English housing survey (2008 to 2017)
2 UK Land Registry data
3 National Centre for Social Research
4 Defined benefit pension schemes - Committees - UK Parliament
5 Legal & General
6 Equity Release Council
7 FT Adviser
8 Financial Reporter
9 Equity Release Council
10 Equity Release Council
11 UK Finance
12 Mortgage Solutions
