Retirement-planning shortfalls, trillions in built-up home equity, and fears over rising long-term health costs are stoking rumors of a reverse mortgage renaissance — only this time, it’s happening across the pond. Circumstances are conspiring to make “equity release mortgages” increasingly attractive to borrowers in the United Kingdom, according to a recent story from the Financial Times.
Though the Home Equity Conversion Mortgage market in the United States remains a small part of the overall domestic lending landscape, it still dwarfs its British counterpart, which the Financial Times pegs at five times smaller than the American marketplace. Still, major players such as Santander have made moves to enter the market, the publication notes, and they could soon expand the overall equity release picture.
Equity boom, pension bust
Writer Patrick Jenkins lays out an eerily familiar scene, noting that U.K. homeowners aged 65 and older control £1.7 trillion in home equity, or about £340,000 per homeowner; for reference, based on Tuesday’s exchange rate, that’s about $2.2 trillion, or $443,000 per house. American homeowners aged 62 or older, meanwhile, have anywhere from $3.6 trillion to $6.3 trillion in available home equity, depending on who you ask.
And though the pension system is notably different in the U.K., British seniors face a similar dilemma as their American counterparts: The World Economic Forum declared Britain’s “pension gap,” or the gulf between what retirees actually have and what they need to maintain 70% of their pre-retirement income, to be one of the worst in the world, totaling £25 trillion, Jenkins writes.
“The government has duly responded. This month, it announced the retirement age would rise to 68 for anyone born after 1970,” Jenkins points out. “A large gap will remain, though — fertile ground for insurers to sell equity release mortgages.”
Jenkins also explains renewed concerns over health care costs for older Britons, another common worry for American seniors. The ruling Conservative Party, which suffered unexpected losses in the nation’s recent snap election, had campaigned on a policy that would require seniors to tap into their personal assets above £100,000 to cover long-term health care expenses, a figure that would include the value of any owned property.
“Although the party rowed back on the no-cap idea, experts believe individuals will have to take more responsibility for funding their own old age care in the future,” Jenkins writes.
Key differences
Of course, the British products differ greatly from domestic Home Equity Conversion Mortgages. “Typical” equity release mortgages in the U.K. allow borrowers to tap into 25% of their home values, either upfront or in an “income drawdown format.”
Echoing similar problems with the U.S. program, Jenkins notes that the British equity release mortgage industry had grappled with issues in its early days, but has since improved.
“In the 1980s, when there was an earlier mini-boom in U.K. equity release, bad sales were rife. Costs were high. And products were designed so that a borrower could easily end up in negative equity — passing on a debt to children,” Jenkins writes.
Though he praised the modern equity release industry’s “more sensitive” approach, Jenkins warned that high rates could potentially turn off some borrowers.
See the full look into the U.K.’s equity release marketplace at the Financial Times.
Written by Alex Spanko
