Article | January 2008 | by Duncan Young
Outlook for 2008
It may sound like madness, but it is always good to start the New Year with a backlog of applications and a feeling of unfinished business. This is not the case for 2008 as the fourth quarter of 2007 was slow for all concerned. According to brokers operating in the equity release space there is a myriad of reasons for this. Some of the points raised were intensely practical such as the postal strike hitting phone based advisers because of the delay in getting packages of brochures and KFIs to potential customers. But others were to do with sentiment and the lack of confidence generally brought about by poor media coverage, Northern Rock and poor house price growth prospects.But the equity release market was contrary to the general mortgage market as some rates were cut or not increased and advance rates were increased rather than reduced.
So what for 2008? The economic factors which drive equity release have not changed – the government has not had a fit of pension largesse or the need for debt consolidation has not gone away. So 2008 will still see a steady flow of business from these sources. Sentiment though is a very different beast and my best guess is that there will be sense of nervousness until the housing market reaches an equilibrium. This is perverse as a falling market should be good for home reversion providers but whatever the attractions of their offering, if people are unsettled about the course of events, then they will simply sit on their hands.
The sub prime crisis – will it have an impact on the equity release market? Unfortunately the answer could be yes and that yes could be detrimental to the long term prospects of the market. The end of 2007 saw a couple of trends coming together. There was an increase in debt consolidation cases and a number of lenders reduced their initial age to 55. So with the sub prime mortgage market effectively shut for many, there is a danger that people who should have a conventional mortgage will instead be sold a lifetime one. There is nothing intrinsically wrong with this so long as the customer suitability is properly addressed. But giving lifetime mortgages as an alternative for people still employed does raise major concerns. Lifetime contracts are just that – for a lifetime. By and large they are finely priced, but as a quid pro quo they carry significant early redemption charges and have limitations on customer flexibility. These restrictions may not seem important during the search for cash but will impinge when the customer wants to move, re-marry or otherwise change their lifestyle. When customers reach this impasse they will not remember the sub prime crisis they will simply call Trevor MacDonald or Which. And remember customers are aged 55 and upwards which leaves plenty of time for several lifestyle changes.
I will also be interested to see if another change of late 2007 will be continued into 2008. Traditionally lifetime mortgage providers have had a simple and easy way of calculating how much cash they will release. In essence there was a table but it was based on the lowest age regardless of sex. That for reversion providers was an anathema as the life tables and the annuity tables both show that joint couples on average live longer than people living by themselves and that women live longer than men. But for lifetime mortgage providers a simple matrix was sufficient for their risk analysis. However in late 2007 Just Retirement broke ranks and its tables give lower levels of advance to joint applicants.
This I think will be followed by other providers as the impact of the Basel II capital adequacy rules and the uncertain housing market combine. Under Basel II lifetime mortgage providers have to provide more capital to support their mortgages if, after a complicated calculation, the loan to value is set to exceed 80%. In doing this the customer’s sex will be a factor. The impact of this test was anticipated to be small but that was when house prices were defying gravity. And a period of several years of real house price declines after adjusting for inflation is now forecast by virtually all economists.
And what of the broker community? Mortgage brokers have been hit by the lack of products in the sub prime arena as well as prime lenders cutting back on procuration fees. So perhaps the attractions of equity release are coming to the fore with procuration fees of up to 3% on offer. These can either be earned by submitting direct to the provider or through one of the increasingly successful referral service partners such as Lifetime Advisory Service.
And finally to SHIP. Within the world of equity release there are many different opinions on the role and success of SHIP. However 2008 sees a bright new future for the organisation. The product providers have stumped up a load of cash and Andrea Rozario has been appointed the first Director General. The amount of goodwill that has surrounded her position has been excellent and she starts with a clean slate and a commitment to achieve what has long been craved – an articulate face for the industry.
So, in conclusion, I see no pyrotechnics for 2008 – a slow start, some dangers from the sub prime overspill, new brokers entering but economics asserting itself and a gradual increase in new business levels.
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