One of the problems writing about equity release is to get hold of up to date ‘real world’ data. The Equity Release Council has some useful data, but their data are somewhat limited.
To try to find more, I recently went through one’s firm’s web portal – I should probably not say which firm it was – and I got the usual promises to give me quotes in seconds, but no joy. The next morning, I got a call just after 9 am from one of its salespeople, despite having not pressed the button saying it was OK to call me. I pointed this out to him, ‘Ah,’ he said. ‘It’s in the small print.’ Small print, on a web portal!? Then he asked me why I was interested. ‘It’s an academic interest, really.’ ‘Oh, right,’ he said. I don’t think that was the answer he was expecting. I thanked him for his interest and we said goodbye.
I now receive regular ‘private and confidential’ material through the mail that I would rather not, and emails on top. The latest email turned out to be unexpectedly helpful, however. It took me to a web-based GUI and after playing around with it for a bit, I was finally able to get quotes in seconds, just as they always promise.
The prospective offers involve a loan rate of 5.7% which is a bit steep considering that ERC report that the latest average loan rate is only 4.11% but there is a lot of variability in ERM loan rates: it pays to shop around.
The GUI also reported an hpi rate. What’s the hpi rate got to do with it, you might ask? The answer, of course, is nothing, but firms like to use it anyway. We are talking Mars in Capricorn here.
Their GUI also gave out enough data to infer LTVs from loan offer amounts for any inputted borrower age. These LTVs were considerably higher than industry averages. That is good for the borrower
Inputting these to my model, I obtained the following estimates for the firm’s expected annualised returns on their loan investments, for couple-borrowers of the same age.
Expected returns to lenders on LifeTime ERM loans
So it’s a case of bad news and good news. The good news is that for borrowers beyond a certain age, new ERM loan are expected to make positive returns for lenders, albeit not high returns and I haven’t taken account of any operational costs. The bad news is that for younger borrowers, new ERM loans can be expected to make losses.
There are some interesting implications here for how firms can improve their profitability.