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Equity release to become 'integral' to retirement planning

Equity release to become 'integral' to retirement planning

24 August 2010 / by Rachael Stiles

Equity release is destined to 'become a more integral part of retirement planning' to counteract the pension crisis, according to financial research company Defaqto.

More retirees will come to rely on equity release to supplement their pensions, argues David Black, banking specialist at Defaqto, despite a number of lenders pulling out of the equity release market in recent years.

"A number of providers have exited the market over the past couple of years citing either funding constraints or more profitable opportunities in alternative product areas," Mr Black said.

"Equity release has long been thought of as a sleeping giant but, given the perilous state of many people's pensions, it can only be a matter of time before the two types of equity release schemes - lifetime mortgages and home reversions - become a more integral part of retirement planning."

Research from Defaqto has revealed that equity release is becoming increasingly more expensive when compared to the residential mortgage market. Its figures show that the gap is widening between the lifetime equity release rates and long-term fixed rate mortgages, the nearest product to equity release in the mainstream market.

The gap now stands at 1.45 per cent, based on an average lifetime mortgage at a rate of 7.17 per cent and the average long-term fixed rate mortgage of 10 years or more at a rate of 5.72 per cent.

This is compared to a gap of 0.63 per cent in August 2007, based on average lifetime and long-term fixed mortgage rates of 7.06 and 6.43 per cent respectively.

But, this widening gap can be explained, at least in part, by changes in equity release regulation; a 'no negative equity guarantee' has been put in place to protect the homeowner, but this represents an additional cost to the mortgage lender of 0.7 per cent per annum, Mr Black explained.

"The equity release business model clearly favours providers who also sell annuities, but the industry in general faces a number of pressing issues if it is to grow. These include: funding constraints need to be remedied; competition needs to increase along with the entry of more 'household name' providers and consumer confidence in the product needs to be reinforced," he added.

"Increased competition should result in a narrowing of the interest rate gap between lifetime mortgages and long term fixed rate residential mortgages."

Andrea Rozario – director general of equity release trade body SHIP (Safe Home Income Plans) – welcomed Defaqto’s report.

"Measures on lifetime mortgages such as the no negative equity guarantee, security of tenure and no monthly repayments affect the pricing structure of the products naturally leading to a slightly higher rate. However, these safeguards provide a wealth of reassurance that customers want when they choose to access the equity in their homes," she explained.

"Within this research, Defaqto also highlighted the growth potential of the market and the benefits that this will bring to consumers. SHIP is actively working to grow the industry and we believe that as the funding issues ease, we will see the market expand and over time, new companies enter the sector."

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