The evolution of equity release has been a steady progression, but it is set to transform the market.

You must know all about it to make an informed decision when considering how to finance your retirement.

The History of Equity Release

Equity release has been available for many decades now, but you can break down its evolution over time into three major periods that were characterised by specific developments in law:

Pre-1992 period (1971 – 1991)

There was no legislation regulating equity release during this phase, and many dubious lenders took advantage of senior citizens.

1992 to 1997

The Equitable Life case¹ ruled that the company's directors did not have unlimited power over pension investments.

1997 onwards

The legislation was passed, such as the Retirement Income Act of 2000 and Equity Release Council Regulations 2003, which most importantly set a debt cap for equity release loans.

Although it has been an incremental process, these developments have led us to where we are now.

Currently, there is much more regulation governing equity release schemes than ever before.

There are some pitfalls in this market that can be risky if people do not know what they are doing or make mistakes with their finances.

The Current Market

There is no doubt that the equity release market is growing and becoming more popular than ever before.

There are several reasons for this:

A decline in equity release interest rates since 2013 has created a demand for mortgages² and loans. As such, there is been an increase in people wanting to pay off their mortgage quicker (and / or retirees who seeking finance).

If you want to see the latest equity release rates, they are available here.*

*Whilst we regularly review interest rates, these may have changed since our last update.

• The Financial Conduct Authority³ now requires lenders to assess how much someone can afford instead of using set criteria which is what used to happen with old loan agreements; this means they have more control over how much they borrow and make sure it is manageable when considering other debts like credit cards or car loans, etc.
• The Equity Release Council has created a standard agreement that all lenders use for equity release products.
• In addition, with the introduction of technology like mobile apps, people do not need to go into their local branch if they need help or information.
• These features mean you can get your banking anywhere.

The Future Market

The future of the equity release market seems very promising, with these three developments potentially being the catalyst for a more vibrant market:

• A 2018 law allows people to sell their properties and have a part or all of the money returned to them as an income over time (known as deferred annuity⁴).
• The government has also made it easier for those who are struggling financially by introducing pensioner bonds. These help retirees get extra cash from the government when they need it most.
• There is been some speculation about whether there may be more more secondary legislation.

Equity release continues to be a popular choice for those who want some extra cash or need help pay off their mortgage.

The next few years will be very interesting, so monitor developments in equity release news.

Innovation

Innovation⁵ is key when it comes to the evolution of equity release products.

For example, we now have more safe options for people with other debts, like credit cards or car loans, not to worry about their finances getting too complicated with age.

However, there are still some drawbacks.

Another thing these developments mean is a greater responsibility put onto equity release lenders.

Although they may want consumers borrowing more to make profits, this also means a higher risk if someone's financial situation changes.

Nevertheless, there has been great progress in the process of equity release products over recent years.

There is still room for improvement, but it seems like the industry is moving in the right direction.

Long and Short-Term Trends

Long-term trends are recognisable as well as short-term ones.

The Q4 2022 Equity Release Report⁶ shows that there is a growing number of people who access equity release products over time.

This means releasing equity is becoming a popular option for retirees.

The other element here is with that these developments, if someone changes their mind about something or needs cash in an emergency, it becomes easier than ever before.

On the other hand, we have also seen a trend of lending companies wanting to encourage people to borrow more so they can make profits.

This means there is the potential for higher interest rates and risks involved with equity release products in the future, but there are a lot of ways to use the equity released.

Competition

There is also competition in the industry, so you should check if the equity release interest rates are competitive enough.

The market is growing for these products, which means more companies are trying to grow their market share.

However, with data protection to the fore (especially given recent events), there may be difficulties in ensuring that those who need equity release products have access without being misled.

Nonetheless, competition is good because it provides more choices and opportunities.

However, there are still some hurdles to cross.

Sandwich Generation Struggles

The sandwich generation⁷ is struggling with the evolution of equity release products.

When your are under pressure with your finances and / or looking after your ageing parents, you may consider using equity release for long-term care. It could be easier for you to handle the expense.

With new developments like pensioner bonds and deferred lifetime annuity, you can save for retirement without worrying about what will happen if money is needed in an emergency.

Nonetheless, drawbacks remain, such as retirees not thinking about how much they spend.

One solution would be for them to borrow only up until a certain point, which will be enough for them to last their lifetime.

This is just one example of how the evolution of equity release products benefits you in different ways!

There are other common uses of equity release, as it is a great way to obtain extra money when you need it.

Traditional Equity Release Vehicles

Traditional equity release vehicles are the existing products that have been available since the 1990s.

They tend to be more expensive and less flexible than other alternatives, but they can provide financial relief when needed most.

This means that these types of products will last until death - in which case, your assets would go towards repaying deductions from interest rates and fees.

It is important to remember that there may be additional equity release costs involved if you decide to surrender one of these loans.

Traditional equity release products are becoming less popular because they are typically more expensive and restrictive.

You will need this type of product if they cannot afford something in full on their own, which is why these vehicles will not disappear in the short-term.

Making the Best Choice

Considering the new era of affordable equity release, it is important to remember your options and how they can impact you differently.

For example, if we take a look at standard equity release loans for homeowners:

Equity release provides an option that is cheaper than traditional vehicles (in terms of monthly payments), but comes with less flexibility because they are not designed for people who want lump sums⁸ or funds that will last until death.

The trade-off here is that this type does not offer any guarantees, like cash-back or interest rates, so it may be worth considering other alternatives before deciding!

In contrast, deferred lifetime annuity involves more money upfront, but could one day save significant sums in interest rates and monthly payments.

Comparing traditional equity release vehicles with other alternatives is important as it can determine what is best for you.

Common Questions

In Conclusion

People are living longer and as a result, they need to find a way to fund their retirement years.

Equity release has evolved into an effective option for seniors who want to maintain their independence in the face of rising costs or declining income.

Speak to an independent financial advisor to discover what is the best option for you, and to keep up with the evolution of equity release.