Rebuilding confidence: why now is the ideal time to release equity from your home

With the impact of the September 2022 mini budget still reverberating through the UK property market, it’s undeniable that the equity release sector has also taken a hit, with a slower than usual start to the year. Higher average rates, lower available LTVs, and the overall cost of living crisis has fostered a sense of caution in over-55 lenders, with data from the Equity Release Council (ERC) highlighting that Q1 2023 had the quietest spell of customer figures since the pandemic in Q2 2020.

Equity release customers are following suit with a more cautious approach, with data from the MAB Later Life Market Monitor Q1 2023 suggesting little evidence of unrestrained spending. Careful financial management has come to the fore, seeing a 2% increase in the use of equity release to repay mortgages.

Nevertheless, while there may be a temporary reduction in the overall number of equity release customers in the UK this quarter, a deep dive into the reasons why customers have chosen to release equity this quarter - despite an unsettling market - illustrates why it remains a suitable option for many.

How people are releasing equity in Q1 2023

Debt management to boost income and reduce outgoings is often a key factor for releasing equity, and over half (54%) of the total amount released was used for this purpose - whether it was repaying a mortgage (34%), a lifetime mortgage (15%), or unsecured borrowing (6%). Furthermore, there has been a 7% increase in customers choosing a lump sum rather than drawdown mortgages. This could be linked to the current market conditions, with lump sums looking more favourable.

That being said, with interest rates fixed or capped at the point of withdrawal for products which meet ERC standards, the number of existing drawdown customers increased by 9% between Q4 2022 and Q1 2023, making it an area of the market that saw the most growth.

Gifting to family or friends (13% of total released) is also a key reason people choose to access some of the value tied up in their homes. In fact, almost one in five (19%) used some or all of the proceeds for this purpose.

Interestingly, in Q1 2023, there was also a 5% increase in the number of single women (including divorced and widowed women in this context) taking out equity release. Compared to recent years, this is a fairly substantial increase.

A resurgence in home improvements

Equity release could enable your customers to enhance their property during their retirement years, making it more comfortable, convenient, and accessible. We can see that nearly half of all equity release customers are using their funds to manage home improvements, and this may be to enhance their quality of life. The average amount released in equity sits at around £81,000, and with the average retrofit costing close to £70,000, this figure makes sense in the world of renovation.

While 45% of people chose to pay for home improvements from the funds they received, this accounted for only a modest 11% of the total amount released which suggests that it is not a key driver behind people’s decisions.

In fact, a closer look at the data revealed that much of that 45% lies in essential repairs, rather than aspirational spending. The home improvements being undertaken may not be about fitting new kitchen cupboards, but rather installing wheelchair lifts. Moreover, while there may be an inherent desire for a more modern bathroom, energy efficiency is likely more at the core of their needs.

As always, your customers’ needs are always paramount, and it’s about finding ways to help them achieve their goals. For instance, if it’s saving money each month on energy, then you could help them further understand how equity release could be used to help them retrofit their homes.

Helping customers put their best foot forward

To effectively meet customer needs in a dynamic, fast-paced market, it’s crucial to conduct a thorough fact-find, as this will ensure that you address the specific requirements of each customer. Don't hesitate to challenge preconceived notions and explore different plan options. Remember to take into account the customer's lifestyle and their current stage in the later life journey. Are they considering inheritances or in need of home refurbishments to meet their changing health requirements?

Considering that 34% of customers use equity release for mortgage repayments, it becomes even more important to understand their end goals when it comes to clearing debt. Do they live more comfortably in terms of their finances, or do they want to redirect their finances to other areas? By comprehending these objectives, you can better assist customers in reaching their financial goals.

Last but certainly not least, suitability and timing are everything when it comes to deciding to release equity, and the same goes for your approach as an adviser. For some, it has made sense to continue with their plans, while other would-be customers have evidently been biding their time to see what interest rates do next. Once again, it all comes back to taking the individual requirements of the customer into account and tailoring your advice - and time of your approach - accordingly.

Why equity release is still an option

As rates decrease and confidence returns, the equity release market is witnessing the resurgence of green shoots. This has been driven by such underlying market factors as insufficient pension provision, intergenerational support ambitions, the desire for a reasonable standard of living in retirement, and pent-up demand. It’s also supported by an increase in product flexibilities, such as the ability to service interest and make ad-hoc repayments.

With the impending Consumer Duty and the potential impact of political developments like the mini-budget, it’s likely that innovation will accelerate in this market. This will enable advisers to serve a more diverse range of customers and ensure that the remaining quarters of 2023 resemble previous years and - most importantly - a return to a healthier market.